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Foreword
We are delighted to present to you, the latest issue of the Tax Scout, our quarterly update on
recent developments in the field of direct and indirect tax laws for the quarter ending
December 2016.
This time, as part of our cover story, we have analyzed the key features of the revised draft
of the Model GST Law, released by the GST Council, in November 2016, vis-a-vis its earlier
version. We have also provided legal updates on: (i) changes in taxation regime pursuant to
demonetisation, and (ii) protocol amending the India-Singapore tax treaty. Additionally, we
have also analyzed some of the important rulings by the Indian judiciary and certain key
changes brought about by way of circulars and notifications, in the direct and indirect tax
regimes in the past three months (October to December 2016).
We hope you find the newsletter informative and insightful. Please do send us your
comments and feedback at [email protected].
Regards,
Cyril Shroff
Managing Partner
Cyril Amarchand Mangaldas
Email: [email protected]
Mumbai | New Delhi | Bengaluru
T A X SCOUT A quarterly update on recent developments in Taxation Law
January 19, 2017 (October 2016 - December 2016)
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Cover Story -
The GST saga continues 4
Legal Alert -
Demonetisation drive – From a tax angle 9
India signs protocol to amend the tax treaty with Singapore 12
Case Law Updates -
Direct Tax
Consideration received for sale of shares is not attributable towards non-compete fee 14
Where no consideration is paid under a demerger scheme, no capital gains tax arise for the transferor, as
the computation mechanism fails 16
No capital gains upon succession of a firm by a private limited company, notwithstanding pre-mature
transfer of shares 19
Depreciation not allowable on grounds of alleged colorable arrangement 21
Indian subsidiary concluding contracts on behalf of the foreign entity constitutes dependant agent PE 25
Consideration from rights given to host, stage and promote racing event not taxable as royalty 28
Consideration paid for the purposes of acquiring the shareholding is not relevant for the purpose of allowing
depreciation in view of 5th proviso to section 32(1) of the IT Act 32
Voluntary payments from parent company to protect capital investment made by it in subsidiary company is
in the nature of capital receipt 35
Indirect Tax
Levy of entry tax does not restrict freedom of trade and commerce or other provisions for inter-state sale 37
Movement of goods from one state to another in pursuance to a purchase order received through online
portal would amount to an inter-state sale 40
Sharing of expenses for a common service will not be a consideration for a service by one to another 42
The power of State to legislate is not curtailed by a Central Act which provided for sharing of revenue 44
Retrospective applicability of the amendment requiring the payment of service tax immediately on entry of
the transaction between associated enterprises in the books of account defeats the doctrine of fairness 46
Client’s logo displayed in the product advertisements of the service provider is not in the nature of
promoting the client’s product and is non-taxable as a business auxiliary service 48
CENVAT credit cannot be availed on the basis of a common invoice issued in relation to input services used
by multiple taxpayers, where such taxpayers were individually registered with the department 51
Non Judicial Updates -
Direct Tax
Revision of Income Computation and Disclosure Standard 52
Phasing out exemptions – rate of depreciation restricted to 40% 54
Central Government prescribes Form for application for immunity from penalty and initiation of proceedings 54
Lumpsum lease premium or one-time upfront lease charges are not rent within the meaning of section 194-I
54
Inside this issue:
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Inside this issue:
Rules and Forms for furnishing statement of income distributed by a securitisation trust notified 55
Government revises India – Korea DTAA, with effect from September 12, 2016 55
Notification of protocol to India-Japan DTAA 56
Revision of India-Cyprus DTAA 57
Rules on business connection of offshore funds amended 57
Clarifications on indirect transfer provisions 58
Draft rules prescribing the method of valuation of the fair market value in respect of charitable or religious
trust or institution 59
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Pursuant to the critical review of the Model GST Law released in June 2016
by all stakeholders, the GST council (“GST Council”) released a revised
version (“GST Law”) in November, last year. This GST Law has sought to
incorporate into its earlier draft, certain taxpayer and trade friendly
provisions, emanating from a plethora of representations and
recommendations received.
In addition, GST Law clarifies concepts and provision on various fronts such
as aggregate turnover, time of supply, e-commerce, etc., and seeks to
introduce new provisions in relation to anti-profiteering, mixed and composite
supply, SEZs, etc.
This article is an endeavor towards reflecting upon the distinguishing features
of the GST Law.
KEY FEATURES
1. Threshold
The GST Law, vide Schedule V, has raised the threshold limit for
compulsory registration to a turnover exceeding INR 20 lakhs in a FY,
except for the States of Arunachal Pradesh, Assam, Jammu and Kashmir,
Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal
Pradesh and Uttarakhand where the threshold is INR 10 lakhs. Such
increase in threshold may result in lesser impact of GST on small scale
suppliers.
2. Aggregate turnover
In terms of the earlier version of the GST Law, the definition of the term,
“aggregate turnover”, included non-taxable supplies, exports and exempt
supplies. Vide section 2(6) of the GST Law, the definition of “aggregate
turnover” does not include non-taxable supplies, however, it still includes
exempt supplies and exports. Accordingly, in terms of the GST Law,
though the definition of “taxable turnover” excludes non-taxable supplies,
it still continues to include turnover from exempt and zero rated supplies.
As a result, such exempt and zero rated supplies shall also form part of
the aggregate turnover in relation to the determination of the threshold,
for registration purposes under the GST Law i.e to say the threshold limit
of INR 20 lakhs/ 10 lakhs, as the case may be, will consist of turnover of
taxable goods and exempted goods, but will not include non-taxable
goods.
THE GST SAGA
CONTINUES…
Cover Story
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3. Consideration
The term “consideration” as defined under section 2
(28) of the earlier version of the GST Law did not
exclude any subsidy given by the State or Central
Government. However, in terms of the GST Law, the
definition of “consideration” specifically excludes any
subsidy given by the State or Central Government. It is
pertinent to note that in terms of the present regime of
indirect taxes, under central excise laws, even
subsidies provided by Central and State Governments
were included in the transaction value for the purpose
of levy of tax. Such inclusion was again carried forward
in terms of the earlier version of the GST Law. This
welcome move under the GST Law, is expected to
result in the reduction of the taxable quantum and
shall thereby, reduce the amount of tax outflow for
industries being granted any subsidies from the
Government.
4. Securities, actionable claims and intangible property
In terms of section 2(49) of the GST Law, the definition
of “goods” excludes “securities”. In addition,
“securities” has been expressly excluded from the
definition of “services” under section 2(92) of the GST
Law. This puts to rest the concerns raised by the
financial services sector, in this regard.
However, actionable claim as defined under section 3
of the Transfer of Property Act, 1882, which was earlier
included under the definition of the term “services”,
has now been brought within the ambit of the definition
of “goods”, whereby, supply of actionable claims shall
continues to attract the levy of tax.
The “intangible property” which was specifically
included within the definition of “services” under the
earlier version of the GST Law, has now been removed,
and the term “services” has been defined under the
GST Law to mean anything other than goods. In terms
of the GST Law, “goods” has been defined to mean
every kind of movable property. Therefore, now there is
no clarity as to the categorization of intangible property,
as to whether it is “goods” or “services”. In so far as,
goods and services are contemplated to have different
classification and rates of taxation, this change in the
definition of the term “services” has the potential of
giving rise to litigations in relation to the classification
and the rate of levy of tax on a transaction involving
supply of intangible property.
5. Scope of supply
The GST Law introduced the concepts of “mixed
supply” and “composite supply”. In terms of section 2
(27) of the GST Law, composite supply is one that
constitutes of two or more supplies of goods or services
or any combination thereof, naturally bundled and
supplied in conjunction with each other in the ordinary
course of business. Vide section 3(5)(a) of the GST
Law, a composite supply shall be taxed as the supply of
the principal supply of the supplies constituting such a
composite supply.
In terms of section 2(66) of the GST Law, a mixed
supply is one where two or more individual supplies of
goods or service or any combination thereof, are made
in conjunction with each other by a taxable person for a
single price. Such a supply should not constitute a
composite supply. A mixed supply, under section 3(5)
(b) of the GST Law, shall be taxed as that supply which
attracts the highest rate of tax. Accordingly, in case of
composite supplies or mixed supplies made by a
supplier, such supplier shall be able to discharge tax on
the total consideration received thereof, and shall not
have to go through the hassle of splitting up the
individual supplies to invoice them and pay tax thereon,
individually. Also, the introduction of the concepts and
provisions pertaining to composite/ mixed supply,
under the proposed regime, is expected to put to rest
the probability of litigations pertaining to classification
of supplies or the rate of levy of tax on individual
supplies, in a transactions involving composite supplies
of goods/ services for a single consideration, such as
construction of a building or a residential complex,
Engineering Procurement Construction (EPC) contracts,
etc.
In terms of Schedule I to the GST Law, supply without
consideration includes supply of good/ services
between related persons/ or between places of
business of a single person in different States or
importation of services from a related person or an
establishment outside India. Therefore, free of cost
supplies transactions undertaken with unrelated
persons shall not be considered as a supply for
purpose of levy of tax. In addition, the said Schedule
does not include transactions in the nature of
temporary application of business assets to a private or
non-business use and retention of assets after
disintegration. Accordingly, transactions involving
perquisites being provided for enjoyment by employees
shall not attract the levy of tax, irrespective of whether
they are used for business purposes or personal
consumption. Further, in terms of the said Schedule, all
kinds of supplies made between principals and agents
would attract tax, irrespective of whether such supply is
undertaken for a consideration or not.
6. Time/ place of supply
In terms of Chapter IV of the GST Law, the provisions in
relation to the time of supply of goods/ services have
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been amended, whereunder, the date of entry of the
receipt/debit in the books of account of the recipient,
shall not play a determinative role in ascertaining the time
of supply of goods/ services. Accordingly, as per section
12 and section 13 of the GST Law, the time of supply of
goods/ services shall be earlier of the dates; the date of
issuance of invoice by the supplier or the date on which
the supplier receives the payment in relation to the
supply. This change has aligned the provisions in relation
to time of supply under the proposed regime, with the
current framework, and is expected to bring about greater
clarity and operational ease.
In terms of section 14 of the GST Law, the provisions in
relation to the determination of the time of supply, where
there is a change in the rate of tax, which was provided
for in respect of services only, in terms of the earlier
version of the GST law, has now been extended to goods
as well.
Section 8 and section 10 of the Integrated GST Act, 2016
(“IGST Act”) have also introduced place of supply
provisions in relation to import/ export supply of goods/
services, whereunder, in case of import of goods, the
place of supply shall be the location of the importer, and
in case of export of goods, the place of supply shall be the
location outside India. In case of services, except in case
of certain specific services, the place of supply shall be
the location of the recipient of service.
7. Rate
In terms of section 8 of the GST Law, rate of the Central
GST (“CGST”) and the State GST (“SGST”) leviable on all
intra-state supply of goods and/ or services shall not
exceed 14% each. In case of intra-state transactions, the
Integrated GST (“IGST”) levied thereon, under section 5 of
the IGST Act shall not be more than 28%. This initiative
was pursuant to the political demand to cap the rate of
GST at a maximum of 18%, in view of reducing the burden
of possible arbitrary tax rates, on both the producers and
consumers, and to create a common market place, which
is the underlying motive of GST. In addition, this may be
construed as an indication that the rate of levy of CGST
and SGST may be the same.
8. Anti-profiteering
The GST Law, vide section 163, has introduced certain
“anti-profiteering” provisions which propose the setting up
of an authority to examine whether the input tax credits
availed by any supplier or the reduction in the price on
account of any reduction in tax rate has actually resulted
in a commensurate reduction in the price of the goods
and/or services supplied to the consumer. Accordingly,
each supplier shall now have to undertake a self-impact
analysis of his transactions to understand the benefits/
savings, if any, accruing to him, as a result of the input
and output tax flow on his transactions, under the new
regime. In the case that there are any savings or benefits
accruing to the supplier, in order to avoid the imposition
of penalty, such benefits shall have to be passed on to the
customer/ consumer. The details of such impact analysis
may have to be kept as part of books of account of the
supplier, so as to maintain evidence towards the
compliances under section 163 of GST Law. The
introduction of such a provision despite being populist in
nature intended towards safeguarding the interest of the
consumer by way of a price control mechanism, it has a
potential of being misused by the revenue authorities.
Similar approach toward putting in place a price control
mechanism has also been followed in other countries,
such as, Australia, Malaysia, Canada, etc. The need for
such provisions shall arise during the period following the
introduction of GST, in view of mitigating the effects of a
possible inflation arising on account of the abolition of the
cascading effect present under the current regime.
However, it is observed that in case of the
aforementioned countries anti-profiteering provisions do
not form part of the GST legislation, but form part of other
welfare legislations or are in the form of independent
legislations.
9. E-Commerce
The GST Law has introduced definitions to the terms
“electronic commerce” under section 2(41) of the GST
Law to mean supply of goods and/ or services including
digital products over digital or electronic network, and
“electronic commerce operator” at section 2(42) to mean
any person who owns, operates or manages digital or
electronic facility or platform for electronic commerce. The
earlier version of the GST Law defined “electronic
commerce” to include activities in the nature supply or
receipt of goods and/ or services or the transmission of
funds or data over an electronic network, primarily the
internet, and the definition of an “electronic commerce
operator” included every person directly or indirectly
owning, operating or managing an electronic platform that
is engaged in facilitating the supply of any goods and/ or
services or in providing information or any other services
incidental to or in connection therewith. Accordingly,
under the GST Law, the definitions of “electronic
commerce”, and resultantly, “electronic commerce
operator” have been widened. In terms of the earlier
version of the GST Law, the definition of ‘electronic
commerce operator’ only covered owners of market
places/ portals such as Amazon/ Flipkart, etc. It
separately provided for an ‘aggregator’, such as Uber/
Ola/ Zipgo. However, vide the GST Law, the term
“electronic commerce operator” covers all kinds of
operators such as suppliers of market place (wherein the
supply and invoicing are undertaken by the actual supplier
of goods and/or services), actual suppliers selling their
products online and suppliers who raise invoices for the
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supplies of other suppliers. Pursuant to such a change,
redundant definitions such as that of “aggregator”, “brand
name” and “branded services” have also been removed.
10. Special Economic Zones (“SEZs”)
Section 3 of the IGST Act, has included supplies made to
an SEZ developer/ unit within the ambit of the definition
of “supplies of goods and/or services in the course of
inter-state trade or commerce”, and vide section 16 of the
IGST Act, such supplies have been declared as zero rated
supplies, whereby, such SEZ developers/ units receiving
such supplies, subject to fulfillment of conditions, shall be
entitled to the refund of IGST paid on such supplies. In
addition, in terms of section 16(2) of the IGST Act, the
supplier of goods and/or services to SEZ developers/
units shall also be entitled to the input tax credit of the
taxes paid on supplies utilized for making such zero rated
supplies. This provides the much awaited clarity on
taxation of transactions in relation to supplies made to
SEZs. Accordingly, the treatment of transactions involving
supplies made to SEZs under the proposed regime may
be expected to be similar to transactions in the nature of
exports, under the present regime of indirect taxes.
11. Transitional Provisions
The GST Law, vide Chapter XXVII, has brought about
various modifications/ additions to the transitional
provisions vis-à-vis as they existed under the earlier
version of the GST Law. Such modifications/ additions
include changes to provisions in relation to the conditions
for the carry forward Input Tax Credit (“ITC”) to the new
regime, availability of ITC on the closing stock to a first
stage dealer/ second stage dealer/ importer, ITC on entry
tax paid on closing stock held, availability of ITC to service
providers engaged in providing exempt services (which
shall be taxable under GST), etc. Such changes have been
introduced in view of facilitating a smooth transition and
enabling the taxpayer leverage on the transitional benefits
by way of providing for the mitigating revenue loss on
account of redundancy of existing ITC brought forward,
under the proposed regime.
In view of the aforementioned, the GST Law appears to
have brought about a lot more clarity in relation to GST, in
line with the expectations of the stakeholders. In the ninth
meeting of the GST Council held on January 16, 2017,
various key decisions in relation to the functional aspects
of the proposed GST regime were taken by the GST
Council.
In this regard, the GST Council indicated that the realistic
timeline for introduction of GST would be July 01, 2017.
The deadlock between the Centre and States on the issue
of dual control of assesses, under the proposed regime,
has been resolved, and it has been decided that the
Centre and the State shall jointly assess all assesses
having a turnover less than INR 1.5 Crore, in a ratio of
10:90. For the assessees having a turnover equal to or
more than INR 1.5 Crore, the assessment would be
undertaken by the Centre and the States in a ratio of
50:50. Such ratio demarcation shall be achieved by way
of computer programming. It has also been decided that
the power to levy and collect IGST, would rest with the
Centre, however, the States will also be cross empowered
in this regard, by way of a special provision in the law.
The next meeting of the GST Council is scheduled on
February 18, 2017, wherein the GST Council would be
discussing the updated draft GST laws.
CONSTITUTIONAL DEADLINE
In terms of section 19 of the 101st Constitutional Amendment
Act, 2016 (“101st Act”), any provision of any law relating to tax
on goods/ services or on both in force in any state before the
commencement of the 101st Act, which is inconsistent with
the provisions of the Constitution as amended by the 101st
Act, shall continue to be in force for a maximum period of one
year from the date of commencement of the 101st Act. The
101st Act received the President’s assent on September 08,
2016, and was notified for commencement on September 16,
2016. Therefore, in terms of the Constitution, GST has to be
implemented accordingly.
In order to meet the July 01, 2017 deadline for the
implementation of GST, it is pertinent that the draft GST
legislation be finalized by the GST Council, to be presented
before the Parliament, well in advance. However, owing to the
history of continual failure of the States and the Centre in
reaching consensus on certain functional aspects of GST,
there may arise a scenario where, the enforcement of GST
may get delayed beyond such extended deadline. In view of
the same, there may arise a need for the extension of the
September 2017 Constitutional deadline (“Constitutional
Deadline”) for the implementation of GST.
In this regard, in terms of section 20 of the 101st Act, the
President of India has the power to issue any order for the
implementation of provisions required for the removal of any
difficulties arising in giving effect to the provisions of the
Constitution as amended by the 101st Act. Such difficulties
include any difficulty in relation to the transition, from the
provisions of the Constitution as they stood immediately
before the date of assent of the President to the 101st Act, to
the provisions of the Constitution as amended by the 101st
Act. Such power may be exercised by the President before the
expiry of three years from the date of his assent to the 101st
Act. In view thereof, the Constitutional Deadline can be
extended by way of a Presidential order in terms of the 101st
Act.
Similarly, in relation to certain specific circumstances, such
as, in cases of emergencies, specific matters in relation to the
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States of Andhra Pradesh or Telangana, etc. the Constitution
has provided for the power of the President to issue such
orders. Such orders can be in relation to the provision of
equitable opportunities and facilities for the people belonging
to different parts of Andhra Pradesh or Telangana in matters
of public employment and education, constitution of an
administrative tribunal for such states, in relation to the
suspension of right to move to court for the enforcement of
rights conferred under Part III of the Constitution, during the
period pertaining to the proclamation of an emergency, etc.
Further, in terms of the 101st Act, any order, in the nature of
the aforementioned, if made, shall as soon as it is made, be
laid before each house of the Parliament.
Keeping that in mind, the Government may also alternatively
opt to proceed with the option of moving a Constitutional
amendment bill for the amendment of the 101st Act, prior to
the elapse of the Constitutional Deadline, in order to amend
section 19 to the 101st Act in relation to such deadline.
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BACK
DEMONETISATION
DRIVE – FROM A TAX
ANGLE
1. Background
The Government of India seems to be extremely solemn in addressing the
menace of black money which is palpable from a number of measures
taken by it in the recent past. Earlier in 2011, the SC had constituted a
Special Investigation Team (“SIT”) under the chairmanship of former
Justice of the SC of India Hon’ble Mr. Justice (retd.) M. B. Shah. It was
constituted primarily with an objective to find measures through which the
ill-gotten wealth of Indian residents that had been illegally parked abroad
could be brought back to India.
In order to accomplish its objective of curbing black money and loss of
revenue, the present Government has undertaken the following
measures:
(a) Introduced the Black Money (Undisclosed Foreign Income and Assets)
and Imposition of Tax Act, 2015 to target unaccounted money and
assets kept abroad and a scheme was also launched to provide an
option to tax evaders to come clean on their past transgressions.
(b) Imposed a penalty of 20% on all cash transactions exceeding INR
20,000 on purchase or sale of property (real estate) and also
introduced tax collection at source at the rate of 1% on cash
purchases exceeding INR 200,000 to check high value cash
transactions and create an audit trail.
(c) To target domestic black money, launched the IDS which gave a
chance to black money holders to come clean by declaring the assets
by September 30, 2016 and paying tax and penalty of 45% on it.
(d) Renegotiated several DTAA with other countries to strengthen the
exchange of information.
(e) Introduced the Benami Transactions (Prohibition) Amendment Act,
2016 with effect from November 01, 2016 which seeks to give more
teeth to the authorities to curb benami transactions.
2. Demonetisation Scheme
After the aforesaid slew of steps, the Government vide Notification S.O.
3408(E) dated November 08, 2016, withdrew legal tender character of
existing series and any older series of currency notes (“Demonetisation”)
in the denominations of INR 500 and INR 1,000 (hereinafter referred to
as specified bank notes), with effect from the midnight of November 08,
2016, to unearth the black money stashed by the tax offenders. The
Government also clarified that the Demonetisation scheme has been
launched to address the rising incidence of counterfeit notes as well as an
anti-terror operation to block cross border funding of terrorists. In
consequence thereof, the specified bank notes could not be used for
transacting business and/or store of value for future usage.
While Demonetisation by itself does not have any tax implications, it is
likely to have significant implications with the CBDT likely to undertake a
close scrutiny of cash deposited or exchanged under this exercise. The
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measures undertaken/to be undertaken could affect
businesses and taxpayers in multiple ways.
The Government had earlier indicated that the cash
deposits made in the wake of Demonetisation would be
subjected to penalty under section 270A of the IT Act,
controversy arose as to whether such a penalty can be
levied if a person voluntarily offers those cash deposits
(on which no tax has ever paid) as income in its return of
income as that would neither amount to under-reporting
nor misreporting so as to levy penalty under section 270A
of the IT Act.
To put an end to the controversy, the Government has
recently enacted the Taxation Laws (Second Amendment)
Act, 2016 (“Act”) by amending section 115BBE of the IT
Act to provide for a higher tax rate of 60% and further a
higher surcharge of 25% on such tax. The broad overview
of the Demonetisation scheme is as follows:
(i) Taxation Laws (Second Amendment) Act, 2016
The Act was enacted to penalize the deposits made
into bank accounts post the Government’s decision to
demonetize high-value currency notes of INR 500 and
INR 1,000.
(a) Section 115BBE of the IT Act has been amended
to provide that any income falling within the
ambit of sections 68, 69, 69A, 69B, 69C and
69D of IT Act shall be liable to be taxed at the
higher rate of 60% of such income, along with
surcharge of 25% of such tax (i.e. 15% of the
undisclosed income). In other words, effectively
75% of the undisclosed income would be
chargeable to tax in view of the amended section
115BBE of the IT Act. It is to be noted that this
tax rate is applicable irrespective of the fact that
such income was declared by the tax payers in
their return of income on their own or is assessed
by the AO.
(b) Section 271AAB of the IT Act has been amended
to provide for penalty of 30% on the undisclosed
income, in cases where search had been initiated
under section 132 of IT Act on or after the
amendment comes into effect, provided that the
tax payer during the course of search admits to
the undisclosed income, specifies and
substantiates the manner in which such income
was derived, on or before due date pays
applicable tax and interest on the undisclosed
income and furnishes the return of income
declaring such undisclosed income. In cases
where no admission has been made during the
course of search proceedings, penalty shall be
levied at the higher rate of 60% of the
undisclosed income.
(c) Section 271AAC of the IT Act has been introduced
to provide that additional penalty shall be levied
at the rate of 10% on the tax payable in respect
of the income falling within the ambit of the
abovementioned section 115BBE of the IT Act. It
also provides that no penalty shall be levied in
respect of such income where the said income
has been included by the taxpayer in the return of
income and tax in accordance with the provisions
of section 115BBE(1)(i) of the IT Act has been
paid on or before the end of the relevant previous
year.
(d) A new chapter IX-A, under the head ‘Taxation and
Investment Regime for Pradhan Mantri Garib
Kalyan Yojana, 2016’, has also been introduced.
It is a variant of the IDS according to which any
person may make declaration in respect of any
income in the form of cash or bank deposits
made with a specified entity during the period of
scheme. The undisclosed income so declared
under the scheme shall be chargeable to tax,
surcharge and penalty aggregating to 50% of the
undisclosed income. Further, an amount of 25%
of undisclosed income shall have to be deposited
in the Pradhan Mantri Garib Kalyan Deposit
Scheme, 2016 with a four year lock-in period and
such deposit shall be interest free. .
(ii) Strengthening the reporting requirements
CBDT vide Notification no. 104/2016 amended Rule
114B (transactions in relation to which PAN is to be
quoted) and Rule 114E (furnishing statement of
financial transaction) of the IT Rules to give effect to
the Demonetisation scheme. The Notification
mandates every person to quote PAN in all
documents pertaining to cash deposits with banks /
post office:
(a) exceeding INR 50,000 during any one day; or
(b) aggregating to more than INR 2,50,000 during
November 09 to December 31, 2016.
Similarly, the notification requires banks / post office
to report transactions of cash deposits of INR
12,50,000 or more in one or more current accounts
of a person; or cash deposits aggregating to INR
2,50,000 in one or more accounts (other than current
account) during November 09 to December 31,
2016, in the prescribed form on or before January 31,
2017.
These measures will ensure that the tax authority is
equipped with the requisite information about cash
deposits which would enable the imposition of tax on
such cash deposits.
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3. Impacts of Demonetisation
While it is too early to assess the long term impacts of
Demonetisation, the bold move is definitely going to leave
its short term and long term impact on both the main as
well as the parallel economy. The proposed GST Bill
seems to have been delayed due to political objection to
the sudden Demonetisation move. Some of the other
possible impacts (both short term as well as the medium
term) of Demonetisation have been summarised as
follows:
(a) The impact of this move will be felt across sectors
with differing intensities, while the agriculture and
informal sector are said to be hit the worst by this
measure. Among others, real estate and
transportation sectors and small traders are also
going to have a very significant impact.
(b) The demonetisation move will provide major boost to
the economy, inter alia by increasing the quantum of
deposits with banks, reduction in lending rate, surge
in investments, making borrowings both available as
well as affordable, etc.
(c) With cash transactions facing a reduction, alternative
forms of payment will see a surge in demand such as
digital transaction systems, e-wallets and
applications, online transactions using internet
banking, usage of plastic money (debit and credit
cards), etc.
It is a million dollar question as too whether these steps
initiated by the Government are sufficient to tackle and
eradicate black money. It will be appreciated that
significant amount of black money is parked in other
forms such as gold, real estate, foreign bonds which
would remain unaffected by the Demonetisation move.
However, with the slew of measures undertaken by the
Government, it appears that a very strong signal has been
given to the tax evaders and other offenders. Due to the
far reaching impact of this sudden move, it is also going to
have a very strong deterrent effect. We understand that in
addition to the above actions, a few other initiatives are
also on the anvil to further reduce the operating space for
the parallel economy.
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BACK
INDIA SIGNS PROTOCOL
TO AMEND THE TAX
TREATY WITH
SINGAPORE
Ever since the India-Mauritius DTAA has been amended vide the protocol
dated May 10, 2016, there has been intense speculation that the India-
Singapore DTAA will also be revised, especially because the protocol signed
with Singapore in 2005 had made the capital gains benefit available to a tax
resident of Singapore to be coterminous with that of the India-Mauritius DTAA.
Indian Government had also been unequivocal in its public statements that it
was a matter of time for other DTAAs to be reworked in order to prevent round-
tripping of funds, treaty shopping by investors and also to ensure that there
was no major erosion of tax base. After the DTAA with Mauritius was revised in
May 2016, the India-Cyprus DTAA was revised in November 2016 through
which capital gains arising to a Cyprus resident from the alienation of shares
of Indian company could now be chargeable to tax in India.
Putting an end to the speculation, the Government issued a press release on
December 30, 2016 confirming the signing of a third protocol with Singapore
to amend the DTAA. The amended DTAA with Singapore will become effective
from April 1, 2017 (see point (v) below).
(i) Capital gains
Similar to the protocol with Mauritius, the new protocol proposes to
amend the India-Singapore DTAA as amended by two protocols signed in
2005 and 2011, to provide the right to tax the capital gains (arising to a
tax resident of Singapore on alienation of shares of the Indian company)
to India. In order to provide predictability and certainty to the foreign
investors, the protocol provides that the investments made prior to April
01, 2017 would be grandfathered and also provides that during the two-
year transition period (i.e. between April 01, 2017 to March 31, 2019),
any capital gains earned by a tax resident of Singapore from the sale of
shares of an Indian company purchased after April 01, 2017 and sold
before March 31, 2019, shall be taxed in India at half the normal Indian
domestic tax rate, subject to fulfillment of LOB clause. The capital gains
will be fully taxable in India (being the source State) from April 01, 2019.
The LOB clause forming part of the India-Singapore DTAA is also on similar
lines with the amended India-Mauritius DTAA i.e. the transition period
benefit shall not be extended to a shell or to a conduit company or to any
other person who had arranged its financial affairs with the primary
purpose of claiming the tax benefits under the India-Singapore DTAA. The
protocol clarifies that a tax resident of India or Singapore shall be deemed
to be a shell or conduit company: (a) if the company is not listed on a
recognized stock exchange in India or Singapore, or (b) if its annual
expenditure is less than INR 5,000,000 or SGD 200,000 respectively
within the prescribed threshold holding periods. It must be noted that the
LOB requirements are in line with the earlier protocol i.e. for shares
acquired prior to April 01, 2017 the expenditure threshold has to be met
for each 12 month periods in the immediately preceding period of 24
months from the date on which gains arise. However, for shares acquired
between April 01, 2017 to March 31, 2019, the LOB’s expenditure
threshold needs to be taken into account only for the preceding 12
months.
Recognised stock exchange has also been defined.
(ii) Availability of MAP process to transfer pricing cases
The protocol also proposes to honour India’s commitments under the
Base Erosion and Profit Shifting (BEPS) Action Plan to meet the ‘minimum
standards’ of providing MAP access in transfer pricing cases, which have
become a most controversial issue.
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In this connection, the protocol proposes to amend Article
9 of the India-Singapore DTAA dealing with transactions
between associated enterprises and enables consultation
between the competent authorities of both contracting
states to eliminate double taxation arising from transfer
pricing or pricing of related party transactions.
This revision is expected to further facilitate the MAP
process under the India-Singapore DTAA and could also
encourage taxpayers in both India and Singapore to
approach the authorities concerned for bilateral APAs
which will go a long way in avoiding unnecessary, time
consuming and expensive litigation.
(iii) It is pertinent to note that the proposed protocol also
enables application of domestic law and measures
concerning prevention of tax avoidance or tax evasion.
(iv) Further, the India-Singapore DTAA will no longer be
coterminous with the India-Mauritius, with the deletion of
the conterminous clause under the new protocol to the
India-Singapore DTAA.
(v) India and Singapore are expected to notify the protocol,
after completion of respective procedures, post which it is
expected to come into force. If the protocol does not enter
into force as on March 31, 2017, on account of pending
notifications, it shall automatically enter into force on April
01, 2017.
With the DTAAs with Mauritius, Cyprus and Singapore having
been revised, the DTAA with the Netherlands remains the only
DTAA which still contains beneficial tax treatment of capital
gains. However, as per information available in the public
domain, the negotiations with the Netherlands have already
started and it is expected that the DTAA shall be revised
shortly. Thereafter, treaty shopping for availing tax benefits in
respect of capital gains may no longer be the only reason for
investors to opt for any specific jurisdiction.
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BACK
Case Law Updates
CONSIDERATION
RECEIVED FOR SALE OF
SHARES IS NOT
ATTRIBUTABLE
TOWARDS NON-
COMPETE FEE
In Sanjay Umesh Vyas1, the Mumbai ITAT held that a portion of the sale
consideration received for sale of shares could not be attributed towards non-
compete fee.
FACTS
Sanjay Umesh Vyas (“Assessee”) was a promoter and director in Synergetic
Information Technology Services (India) Pvt. Ltd. (“the Company”), which was
engaged in the business of software training. The Assessee and another
shareholder held 50% shares each in the Company. Pursuant to a takeover of
the Company by M/s Aptech Ltd (“Aptech Ltd”), the Assessee had to transfer
70% of his total shareholding in the Company, vide a share purchase and
subscription agreement and a shareholder agreement, executed separately.
On the said transaction the Assessee disclosed long-term capital gains in his
income tax return. However, the AO relying upon a non-compete clause
specified in the share purchase and subscription agreement, observed that
the consideration for sale of shares was inclusive of non-compete
compensation and assessed a portion of the consideration as business
income under section 28(va) of the IT Act.
The Assessee challenged the order of the AO before the CIT(A), which ruled in
favour of the Assessee. Subsequently, aggrieved by the order of the CIT(A), the
IRA appealed before the ITAT.
ISSUE
Whether, in the facts and circumstance of the case, a portion of consideration
received for transfer of shares can be attributed towards non-compete
compensation?
ARGUMENTS/ANALYSIS
It was argued on behalf of the Assessee that the Assessee had continued to
hold a minority share in the Company and was actively involved in the
management of the Company, for which he was remunerated separately.
Therefore, the non-compete clause was only standard requirement to protect
the interest of the acquirer and also to avoid any conflict of interest which
could not be a ground for allocation of a part of sale consideration towards
non-compete fee. On the other hand, the IRA argued that a specific non-
compete clause was present in the share purchase and subscription
agreement, therefore, a portion of the total consideration was allocable
towards the non-compete clause and the same should be liable to tax as
business income.
DECISION
The ITAT upheld the decision rendered by CIT(A) and
noted that M/s Aptech Ltd. vide its response to the
clarifications sought by IRA had stated that it had not paid
any consideration to the Assessee other than the sale
consideration paid for the transfer of shares. Further, the
ITAT held that non-compete compensation referred to in
section 28(va) of the IT Act referred to any sum received for not carrying out
any activity in relation to any business or for not sharing any intellectual
Direct Tax
“No part of consideration
received for sale of shares can
be attributed towards non-
compete fee unless
consideration is separately
agreed.”
1. ACIT v. Shri Sanjay Umesh Vyas ITA No. 3963/Mum/2011 (Mumbai ITAT).
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property relating to the business sold or transferred. However,
in the instant case the Assessee not only continued to be a
shareholder in the Company but was also actively participating
in the affairs of the Company, with no restrictions from
carrying out any activity. In addition, the ITAT also highlighted
that in case of the second shareholder, no such additions
were made on this account, pursuant to a scrutiny under
section 143(3) of the IT Act.
The ITAT observed that the entire amount of consideration
should be considered the full value of consideration for the
transfer of capital asset under section 48 of the IT Act, and AO
was not justified in attributing any portion of the sale
consideration towards non-compete fee.
SIGNIFICANT TAKEAWAYS
The key point which needs to be considered in order to
determine whether the consideration received for transfer of
shares ought to be apportioned towards non-compete fee,
would be based on the language used in the relevant
agreements. The terms of the arrangement can be visible
from the language used in the definitive agreements and
hence, the importance of the language of the agreements
cannot be undermined.
In this connection, it is important to analyse the facts so as
to ascertain whether the subject case is closer to the facts
present in Ramesh D. Tainwala2 or in Savita N. Mandhana3.
In the case of Savita N. Mandhana (supra), an agreement
was entered into to transfer the shares of a closely held
company. The agreement in addition to specifying the
consideration for transfer of shares also provided for a non-
compete clause. However, the agreement did not provide for
separate consideration towards non-compete fees. The AO
had apportioned total consideration towards consideration
for non-compete and taxed the said amount as business
income. The ITAT relied on the decision of the coordinate
Bench in the case of Hami Aspi Balsara4, where it was held
that no part of the sale consideration received for transfer of
shares should be allocated towards non compete fee and
taxed under section 28(va) of the IT Act. Section 28(va) of
the IT Act would be attracted only when the taxpayer was
carrying on a business and not where the taxpayer only had
a right to carry on the business through a capital asset.
Relying upon the decision of Hampi Aspi (supra), the ITAT
held that no portion of the total consideration could be
allocated towards non-compete fee. It may be noted that the
Delhi ITAT also took a similar stance in the case of Smt.
Sangeeta Wij5.
On the other hand, in the case of Ramesh D. Tainwala
(supra), the shares of a company were acquired by another
company. The taxpayer entered into an agreement for
transfer of shares and operation of the company in good
and running condition. The agreement inter alia provided for
a non-complete clause and a separate consideration for the
same. The question that arose was whether such
consideration would be taxable under section 28(va) of the
IT Act. The taxpayer had argued that since the amount was a
compensation for loss of source of income, it was in the
nature of a capital receipt and hence not taxable. The ITAT
held that such income would be taxable under section 28
(va) of the IT Act as non compete fee and question of
applying proviso (i) of section 28(va) of the IT Act exemption
and taxing the same as capital gains does not arise as there
was no transfer of right to carry on business.
Thus, it can be observed that where the agreement itself
provides for a separate consideration towards non-compete,
the amount may be taxable as business income under
section 28(va) of the IT Act. However, where consideration is
entirely towards transfer of a capital asset, ad hoc
apportionment of consideration towards non-compete fee
only for the fact that the agreement has a non-compete
clause, cannot be justified. Therefore, the relevant clauses
in the definitive agreements have to be drafted carefully.
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2. Ramesh D. Tainwala v. ITO TS-594-ITAT-2011(Mum) (Mumbai ITAT).
3. ACIT v. Savita N. Mandhana TS-593-ITAT-2011(Mum) (Mumbai ITAT).
4. Hami Aspi Balsara v. ACIT (2009) 30 DTR 576 (Mum) (Mumbai ITAT).
5. ACIT v. Smt. Sangeeta Wij (ITA ppeal No. 4274 (Delhi) of 2011) (Delhi ITAT).
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WHERE NO
CONSIDERATION IS
PAID UNDER A
DEMERGER SCHEME,
NO CAPITAL GAINS TAX
ARISE FOR THE
TRANSFEROR, AS THE
COMPUTATION
MECHANISM FAILS
In Aditya Birla Telecom Limited6, the Mumbai ITAT held that in a scheme of
demerger, as no consideration was accrued to or was received by the
Assessee, the IRA was not justified in computing the capital gains on the
transfer of undertaking by imputing a notional consideration.
FACTS
Aditya Birla Telecom Limited ITC Ltd. (“Assessee”) is a wholly owned subsidiary
of Idea Cellular Limited (“ICL”). During the FY under consideration, the
Assessee filed a scheme of arrangement under sections 391 to 394 of the CA,
1956 with the Gujarat HC and Bombay HC for demerging its telecom
undertaking (engaged in providing telecom services in Bihar telecom area) to
ICL which was duly approved by the HCs. Under the said scheme, the Assessee
had transferred all the assets and liabilities of the telecom undertaking to ICL
without any consideration. As a part of the scheme, the Assessee also
revalued its investment in Indus, an asset separate from the demerged
undertaking and a Business Restructuring Reserve (“BRR”) was created.
During the course of the assessment proceedings, the AO held that the
demerger conditions were not satisfied and the undertaking was transferred
as a slump sale under section 50B of the IT Act and accordingly, computed the
short term capital gains on the same, considering the revaluation of the
investment in Indus as full value of the consideration. The Assessee filed an
appeal before the CIT(A), who confirmed the action of the AO. Aggrieved by the
CIT(A)’s order, the Assessee preferred an appeal before the ITAT.
ISSUE
(i) Whether the transfer of assets and liabilities in a scheme of demerger,
without any consideration, would amount to a slump sale under the
provisions of the IT Act and thus would be liable to taxation under the
head “capital gains”?
(ii) Where no consideration is paid under a scheme of demerger, can the AO
artificially assume the value of the sale consideration, in absence of any
specific provision to this regard?
(iii) In absence of any sale consideration, will the computation mechanism for
calculation of capital gains fail?
ARGUMENTS/ANALYSIS
The IRA contended that it was not a demerger within the meaning of IT Act
and, therefore, the Assessee would not be entitled for any exemption from
capital gains tax under section 47 of the IT Act. The IRA further contended that
for the purpose of computing the capital gains tax, the full value of
consideration accruing to the Assessee is the revalued
amount of investment in Indus which the Assessee had
retained with itself. Accordingly, the IRA denied the
exemption of gift as contemplated under section 47(iii) of
the IT Act. Further, the IRA also contended that such
transfer was a slump sale within the meaning of section
50B read with section 2(42C) of the IT Act. Consequently,
the capital gains were computed in the hands of the
Assessee considering the revaluation of the investment
appearing in the BRR, as full value of the consideration.
BACK
“No capital gains tax in case
business undertaking is
transferred without any
consideration”
TAX SCOUT | Oct - Dec 2016
6. Aditya Birla Telecom Limited v. DCIT TS-608-ITAT-2016 (Mum) (Mumbai ITAT).
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The Assessee, on the other hand, argued that it is a cardinal
principle of law that the charging section and the computation
provisions together constitute an integrated code and when
there is a case to which the computation provisions cannot
apply at all, it would imply that such case was not intended to
fall within the scope of charging section. In support of the
same, the Assessee relied on several decisions7.
Further, the Assessee stated that the transfer of a capital
asset, only real or actual gain that accrues/arises from
transfer of the assets can be taxed in the hands of the
transferor and hence, in absence of any sale consideration
(and resultant profit from the transfer), no notional gain can
be imputed in the hands of the Assessee to tax such transfer.
The Assessee placed reliance on several decisions which dealt
with similar principles8. The Assessee further contended that
only two other sections (i.e. sections 50C and 50D of the IT
Act) allow for imputation of consideration, which are not
applicable to the case of the Assessee and hence, no
consideration can be imputed. As far as treating the amount
appearing in the BRR as full value of consideration is
concerned, the Assessee argued that the BRR merely
represented a notional reserve created to bring the value of
the investments held in Indus to its fair value and did not in
any manner represent any consideration received by the
Assessee.
The Assessee further argued that the voluntary transfer of
property by any person without any consideration is regarded
as gift, which is exempt under section 47(iii) of the IT Act. For
this, the Assessee relied upon several decisions9. The
Assessee also vehemently argued that demerger is not
chargeable to tax by virtue of specific exemption provided
under section 47(v) of IT Act, as the transfer was by a wholly
owned subsidiary company to its Indian holding company.
DECISION
In the absence of any consideration received by the Assessee
for the demerger of its telecom undertaking to ICL, no capital
gains could be said to have accrued to it. Therefore, the
addition made by the IRA to the Assessee’s income in relation
to the demerger is incorrect and hence, was deleted.
The ITAT observed that there were only two other provisions in
the IT Act, namely sections 50C and 50D of the IT Act, which
provided for imputation of consideration, both of which were
inapplicable to the instant case on account of the following:
(i) Section 50C of the IT Act provides that where
consideration received/ accruing as a result of transfer of
a capital asset, being land or building or both, is less than
the value adopted for stamp duty purposes, then the
stamp duty value shall be deemed to be the sale
consideration for the purposes of computing capital gains.
In the instant case, it was a case of transfer of a business
undertaking and not of land or building in isolation and,
therefore, the section 50C could not be applied.
(ii) Section 50D of the IT Act provides for assumption of fair
value of an asset as its sale consideration in cases where
sale consideration accruing/ received as a result of a
transfer is indeterminate or not ascertainable. Since
section 50D of the IT Act has been inserted by the
Finance Act, 2012, with effect from AY 2013-14, the
provision could not be applied as the AY under
consideration was 2010 –11.
Further, reliance was also placed on the landmark decision of
the SC in the case of B.C. Srinivasa Setty (cited supra) wherein
it was held that the charging and computation provisions
together constituted an integrated code under the IT Act.
Therefore, where computation provisions could not be applied,
such a case was not intended to fall within the scope of the
charging provision. In other words, when the computation
provision in the IT Act fails, the charging provision also fails.
The ITAT took note of various cases relied upon by the
Assessee to support the proposition that no capital gains
could be levied due to a failure of the computation
mechanism. The ITAT also noted that the IRA had failed to
understand that the BRR created in the books of the Assessee
was merely an accounting entry made in its books on account
of revaluation of its investment in Indus and that the amount
representing an accounting entry could not possibly be
deemed to be the value of consideration for the transfer of the
telecom undertaking, especially when the Assessee did not
receive any consideration in return. The BRR merely
represented a notional reserve created to bring the value of
the investment held in Indus to its fair value.
The ITAT also held that profit or gain or the full value of the
consideration cannot be arrived at on a notional or
hypothetical basis. The profit or gain to the transferor must be
a distinctly and clearly identifiable component of the
transaction. The consideration for the transfer of a capital
asset cannot be implied or assumed and gain cannot be
inferred on a deeming or presumptive basis. What can be
taxed in the hands of the transfer under the IT Act is real or
actual gain that accrues/ arises from the transfer of a capital
asset and hence, in the absence of any sale consideration
(and resultant profit from such transfer), no notional gain
could be imputed and consequently taxed.
The ITAT also concluded that wherever considered
appropriate, the Legislature itself had inserted specific
provisions for the assumption of sale consideration for the
transfer of assets in specified cases. It was, therefore, unjust
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7. CIT v. B.C. Srinivasa Setty (1981) 5 Taxman 1 (SC); PNB Finance Ltd. v. CIT (2008) 175 Taxman 242 (SC); Amiantit International Holding Ltd., In re
(2010) 189 Taxman 149 (AAR – New Delhi); Dana Corporation, In re (2010) 186 Taxman 187 (AAR – New Delhi).
8. Amiantit International Holding Ltd., In re (2010) 189 Taxman 149 (AAR – New Delhi); Baijnath Chaturbhuj v. CIT (1957) 31 ITR 643 (Bombay HC); Dana
Corporation, In re (2010) 186 Taxman 187 (AAR-New Delhi); CIT v. Shivakami Co. (P.) Ltd (1986) 25 Taxman 80K (SC).
9. DP World (P.) Ltd. v. DCIT (2014) 162 TTJ 446 (Mumbai ITAT.); Redington (India) Ltd v. JCIT (2014) 49 taxmann.com 146 (Chennai ITAT.); DCIT v. KDA
Enterprises (Pvt) Ltd (2015) 39 ITR(T) 657 (Mumbai ITAT); Vodafone Essar Gujarat Ltd v. Department of Income-Tax (2012) 24 taxmann.com 323
(Gujarat HC).
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and unwarranted to impute / assume consideration in cases
which clearly did not fall within the ambit of such specified
provisions.
Further, in the instant case, there was no nexus between the
transfer of the telecom undertaking by the Assessee and the
revaluation of the investment in Indus, except that both
transactions independently arose from the same scheme of
arrangement.
The ITAT accordingly concluded that since no consideration
was received by the Assessee on account of the demerger, no
profit or gain arose which could be exigible to tax. Further, as
the contention of the Assessee regarding no capital gains in
absence of any consideration for de-merger of the telecom
undertaking had been accepted, the ITAT did not deal with the
other arguments of Assessee (including whether the
transaction would be considered to be a slump sale or not).
SIGNIFICANT TAKEAWAYS
The present ruling is significant in confirming the principle
laid down by various judgments that for purpose of taxation
under the head “capital gains”, the charging section and the
computation provisions are inextricable linked. In a case
where the computation mechanism fails, the tax authorities
cannot impute/ assume a consideration when the
Legislature does not provide for any specific provision in this
regard. The ITAT has comprehensively summarized various
arguments/ principles laid down by several analogous
decisions and reconfirmed the principles laid down through
judicial precedents surrounding corporate restructurings by
way of intra-group transfer of undertakings, without any
consideration.
It is pertinent to note that similar transfers become
necessary in case of internal group restructurings and this
decision further encourages similar restructurings in the
future.
It will also be interesting to note what the courts would
decide on dividend distribution tax implications in case of
transfer of assets/ business undertakings by a company to
its shareholders without any consideration, in a case where
the definition of demerger is not satisfied.
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NO CAPITAL GAINS
UPON SUCCESSION OF
A FIRM BY A PRIVATE
LIMITED COMPANY,
NOTWITHSTANDING
PRE-MATURE
TRANSFER OF SHARES
In M/s Umicore Finance10, the Bombay HC held that violation of the conditions
prescribed under clause (d) of proviso to section 47(xiii) of the IT Act did not
give rise to capital gains since no profit or gains arose at the time of
succession of a partnership firm by a company.
FACTS
The respondent, M/s Umicore Finance (“Respondent”), a non-resident
company incorporated in Luxembourg purchased 100% shareholding of M/s
Anandeya Zinc Oxides Private Limited (“Company”) in the year 2008. The
Company was incorporated as a private limited company succeeding erstwhile
partnership firm Anandeya Zinc Oxides, whose conversion was effected under
Part IX of CA, 1956 in the year 2005. In view of transfer of shares of the
Company to the Respondent, before the expiry of 5 years, the condition in
section 47(xiii)(d) of the IT Act (transactions not regarded as taxable transfers)
was violated, giving rise to capital gains tax liability for the Company. The
Respondent had sought a ruling from the AAR on such liability. The AAR ruled
in favour of the Respondent and held that no capital gains accrued at the time
of succession of the firm by the Company, even if there was violation of
section 47(xiii)(d) of the IT Act due to transfer of shares of the Company before
expiry of the stipulated 5 years.
Being aggrieved by the ruling of the AAR, the IRA challenged the ruling by filing
a writ petition before the Bombay HC.
ISSUE
Whether the Company is liable to pay capital gains tax on conversion of a firm
into private limited company as the shares of the Company were transferred
before 5 years, violating the conditions of section 47(xiii)(d) of the IT Act?
ARGUMENTS/ANALYSIS
Section 47(xiii) of the IT Act excludes the transfer of capital asset as a result of
succession of a firm by a private limited company, from purview of capital
gains taxation, subject to fulfillment of conditions laid down in clauses (a) to
(d) of proviso to section 47(xiii) of the IT Act. One of the conditions prescribed
in clause (d) require that the aggregate shareholding in a company (formed
upon conversion) should not be less than 50% of the total voting power in the
company, and their shareholding continues to be as such for a period of 5
years from the date of succession. IRA, based on the provisions of section 47A
(3) of the IT Act which provides for the withdrawal of exemption provided under
section 47(xiii) on violation of conditions prescribed therein, contended that
the Company was liable to pay capital gains tax as shares of the Company
were transferred to the Respondent before expiry of 5 years from the date of
conversion. The IRA, in order to further substantiate its submissions, also
contended that conversion of a firm which does not have a
separate legal identity into a company, which has a
separate legal identity, fell within the inclusive definition
of ‘transfer’ in section 2(47) of the IT Act.
The Respondent on the other hand contended that
conversion of firm into the Company did not entail any
sale/ extinguishment of any right and transfer as
envisaged under section 45(1) of the IT Act and hence,
such conversion did not attract capital gains tax despite
violation of condition under section 47(xiii)(d) of the IT
Act. Further, it was clarified by the Assessee that there was no revaluation of
BACK
“Subsequent violation of
condition under section 47(xiii) of
the IT Act need not give rise to
any capital gains tax liability,
when no gains accrued / arose
at the time of conversion”
10. CIT v. M/s Umicore Finance (2016) 76 taxmann.com 32 (Bombay HC).
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assets at the time of conversion and the assets and liabilities
of the firm as also the partners, capital and current accounts
were taken at their book value in the accounts of the
Company. The Respondent also submitted that the first year
audited accounts of the Company for FY 2005-2006 were also
filed and it was found that the net worth of the Company as on
date of conversion remained same as it was in the hand of
erstwhile firm and there was no such increase in value.
DECISION
The Bombay HC affirmed the ruling and reasoning provided by
the AAR and held that as no capital gains accrued on account
of such conversion, the exemption provided to the Company
by virtue of the conversion would not cease, even though a
clause (d) of section 47(xiii) of the IT Act was violated. It was
stated that withdrawal of the exemption under section 47A(3)
of the IT Act would be warranted only to tax capital gains
arising from transfer of assets. Therefore, deeming provision
under section 47A(3) of the IT Act cannot be construed to levy
capital gains, if no profits or gains arose on conversion of the
firm into a company or if there was no transfer of capital
assets of the firm at the time of conversion. Bombay HC
approving the AAR reference to the reasoning given in Texspin
Engineering Manufacturing11 held that section 47A(3) of the
IT Act cannot be read as standalone provision and basic
provisions of section 45(1) and section 48 of the IT Act should
be taken into account.
In the instant case, it was held that no profit or gains arose at
the time of conversion of firm into the Company. The shares
allotted to partners of the firm upon conversion could not be
construed as the partners receiving any gains by virtue of such
conversion. Even if it is assumed that there was transfer of
capital assets, given no objection by IRA to accounts of the
Company filed which indicated no enhancement in value, no
capital gains arose.
Reliance was placed on Texspin Engineering (supra), to
discern the legislative intent behind section section 47(xiii) of
the IT Act which was to promote more conversion of firms into
companies and such conversions were stipulated as
transmissions and not transfers, as the assets got vested in
the private company by statutory mandate.
SIGNIFICANT TAKEAWAYS
Through the instant decision, the Bombay HC has ruled that
the chargeability of capital gains tax under section 47A(3) of
the IT Act would be relevant only if profits/ gains accrue or
arise from the transfer of such capital asset under section
45 of the IT Act and deeming provisions of 47A(3) of the IT
Act are not absolute. It is pertinent to note that as per
Section 45(4), chargeability to capital gains tax arises where
the distribution of capital assets occurs either by way of
dissolution of the firm or otherwise. The view of the Bombay
HC in Texspin Engineering (supra) had also been affirmed by
the Gujarat HC in the case of Well Pack Packaging12 and by
the Andhra Pradesh HC in the case of United Fish Nets13.
However, in case of conversion of a private company into a
limited liability partnership, the Kolkata ITAT had held that
since one of the conditions stipulated in section 47(xiiib) of
the IT Act was not fulfilled, would not be entitled to the
benefit of capital gains exemption under section 47(xiiib) of
the IT Act.14
BACK
11. CIT v. Texspin Engg. & Mfg. Works (2003) 263 ITR 345 (Bombay HC). The Bombay HC herein held that vesting of property on conversion of a partnership
firm to a private company do not attract the condition of distribution of assets on dissolution of a firm under section 45(4) of the IT Act.
12. CIT v. Well Pack Packaging (Tax Appeal No. 368 of 2001, decided on December 03, 2014) (Gujarat HC).
13. CIT v. United Fish Nets (2014) 50 taxmann.com 267 (Andhra Pradesh HC).
14. Aravali Polymers LLP v. JCIT (2014) 65 SOT 11 (Kolkata ITAT).
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DEPRECIATION NOT
ALLOWABLE ON
GROUNDS OF ALLEGED
COLORABLE
ARRANGEMENT
In Sanyo BPL (P.) Ltd.15, the Bangalore ITAT affirmed the disallowance of
depreciation on “distribution network” acquired on a slump purchase basis
and held that a “distribution network” cannot be classified as an intangible
asset. It also upheld the disallowance of depreciation on other fixed assets
(acquired on slump purchase basis) claimed by the assessee while confirming
the restricted allowance of depreciation on such other fixed assets by the AO
by invoking the provisions of Explanation 3 to section 43(1) of the IT Act.
FACTS
Sanyo BPL (Pvt.) Ltd. (“Assessee”) was an Indian company engaged in the
business of manufacturing and trading of colour television (“CTV”) and
accessories. The Assessee was 50:50 joint venture of Sanyo Electric Company
Ltd., Japan and BPL Sanyo Ltd. (“BPL Ltd.”). In AY 2006-2007, the CTV
business of BPL Ltd. was transferred on a slump sale basis to the Assessee for
a consideration of INR 360 crores.16 The purchase consideration of INR 360
crores was accounted in the books of the Assessee in accordance with the
values assigned by an independent registered valuer, among various assets
including the “distribution network”, on the basis of market value of such
assets.
As per the depreciation schedule, the total value of intangible assets was INR
188 crores (approx.) and addition of INR 268 crores (approx.) were shown. The
break up of intangible assets included “distribution network” of INR 44 crores
(approx.) which was acquired as a part of the slump purchase. The Assessee
claimed depreciation on the value of “distribution network”. However, the AO
disallowed the claim for depreciation, on account of the following reasons:
(i) BPL Ltd. had transferred its CTV division only. For the purpose of valuation
of “distribution network”, only “dealers and distributors” were considered.
However, “dealers and distributors” were dealers and distributors for all
the BPL brand goods, including electrical appliances and they were not
exclusive dealers for CTVs. Furthermore, these dealers and distributors
were not brand specific only to BPL, but sold CTVs of other brands and
competitors also;
(ii) The basis of valuation of “distribution network” was “saving of future costs
if marketed individually” and was based on estimation;
(iii) The valuation of assets was not done properly. This conclusion was
formed in respect of the valuation of all assets on the basis that the
valuation of land was shown at a lesser value than the value fixed as per
the guidance value under stamp valuation. This, therefore, led the AO to
believe that the value apportioned to various assets is not the fair market
value, but done with an intention of claiming higher claiming depreciation,
i.e. with the ulterior motive of tax evasion;
(iv) Since BPL Ltd. continued to be part of the Assessee
company (being 50% shareholder), in reality, there was
no actual transfer of “distributor network” and therefore,
nothing changed on ground but only on paper. The CTVs
would be rolled out from BPL Sanyo table to the same
distributors/ dealers, who in turn would sell to the
customers. No new network was needed to be
established by the Assessee at all because the network
already existed and the brand BPL was inherent in the
BACK
“Depreciation disallowed where
colorable device was adopted to
avoid tax.”
15. Sanyo BPL (Pvt) Ltd. v. DCIT (2016) 75 taxmann.com 253 (Bangalore ITAT).
16. In terms of the business transfer agreement dated December 14, 2005.
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name of the Assessee and its products. Hence, there was
no question or need for the Assessee to establish the
network again. Also, there was no need to pay BPL Ltd., as
BPL Ltd. was a 50% stakeholder in the Assessee and
retained the brand name.
Further, the AO also disallowed the depreciation on other fixed
assets acquired pursuant to the slump purchase, by invoking
Explanation 3 to section 43(1)17 of the IT Act and restricted
the allowance of depreciation by allowing depreciation on the
value of fixed assets as increased by 25% of the closing
written down value in the books of BPL Ltd. i.e. the seller. The
AO disallowed such depreciation claim of the Assessee on the
following grounds:
(i) The lands were under-valued;
(ii) The Assessee had under-valued land and increased the
value of other fixed assets and found it surprising as to
how the value of depreciable items, such as plant and
machinery, dies, tools, furniture and fixtures, etc. can be
increased from INR 15.75 crores (as appearing as closing
WDV in the books of BPL Ltd.) to INR 73.83 crores (as per
the valuation report) as the numerical figures in the
valuation vis-à-vis the closing WDV in the books of BPL
Ltd. appeared unconvincing in terms of the authenticity of
the valuations.
The CIT(A) upheld the order of the AO. Aggrieved by the order,
the Assessee filed an appeal before the ITAT.
ISSUES
(i) Whether a “distribution network” could be classified as an
“intangible asset” for the purpose of claiming depreciation
under section 32 of the IT Act?
(ii) Whether the disallowance of depreciation on “distribution
network” was justified?
(iii) Whether the AO was justified in invoking Explanation 3 to
section 43(1) of the IT Act and disallowing depreciation on
other fixed assets?
ARGUMENTS/ANALYSIS
The Assessee argued that the claim for depreciation was
made on the basis of the valuation done by an independent
valuer among various assets. It was submitted that the AO had
disallowed depreciation on fixed assets alleging over-valuation
of fixed assets without any basis and evidence. In respect of
disallowance of depreciation on “distribution network”, the
Assessee submitted that even if it is assumed that distribution
network has not resulted in any intangible asset, excess price
paid for acquisition of the business should be treated as
goodwill, which is eligible for depreciation in the light of
decision of the SC in the case of Smifs Securities Ltd.18
DECISION
1. Classification of “distribution network” as intangible asset
and disallowance of depreciation on “distribution
network”
The Bangalore ITAT upheld the disallowance of
depreciation on “distribution network”. It was observed
that even if it was assumed that there was no “intangible
asset” as “distribution network”, excess of consideration
over assets taken over would constitute goodwill as per
judicial precedents in the light of the decision of the Delhi
HC in the case of Triune Energy Services (P.) Ltd.19. It also
quoted the SC decision in the case of Smifs Securities
Ltd. (supra), in which case it was held that intangible
assets in the nature of goodwill were qualified for claiming
depreciation.
It was further stated that valuation of goodwill was the
bone of contention between the Assessee and the IRA.
Further, depreciation was admissible on the “actual
cost”20 which was required to be determined. It was
mentioned that since the Legislature had prefixed the
word “actual” to the word “cost”, it suggested that the
intention of the Legislature was to curb the malpractices
and tendencies to inflate capital costs for obtaining higher
depreciation while not burdening the other with any
material tax liability and to exclude collusive, inflated and
fictitious cost. For this purpose, the Bangalore ITAT
examined various judicial precedents21. It was, thereafter,
summarized that the IRA have ample powers to determine
the “actual cost” of the asset which is eligible for
depreciation as the circumstances of the case would
justify.
After examining the facts of the case, the Bangalore ITAT
observed that since the seller had a 50% stake in the
Assessee and the Assessee had failed to controvert the
misgivings of the AO, the circumstances justify the AO’s
inference that a fictitious price had been put on the asset
in order to avail higher depreciation under the IT Act.
BACK
17. Explanation 3 to section 43(1) of the IT Act provides that where, before the date of acquisition by the assessee, the assets were at any time used by any
other person for the purposes of his business or profession and the AO is satisfied that the main purpose of the transfer of such assets, directly or
indirectly to the assessee, was the reduction of a liability to income tax (by claiming depreciation with reference to an enhanced cost), the actual cost to
the assessee shall be such an amount as the AO may, with the previous approval of the Joint Commissioner of Income Tax, determine having regard to
all the circumstances of the case.
18. CIT v. Smifs Securities Ltd. (2012) 348 ITR 302 (SC).
19. Triune Energy Services (Pvt.) Ltd. v. DCIT (Income Tax Appeal Nos. 40 & 189 of 2015) (Delhi HC).
20. As per section 43(1) of the IT Act, “actual cost” means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any,
as has been met directly or indirectly by any other person or authority.
21. CIT v. Dalmia Dadri Cement Limited (1980) 125 ITR 510 (Delhi HC), Guzdar Kajora Coal Mines Ltd. v. CIT (1972) 85 ITR 599 (SC), Jogta Coal Co. Ltd. v.
CIT (1965) 55 ITR 89 (Calcutta HC).
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Going one step ahead, the Bangalore ITAT remarked that
in any event, “right to use distribution network” did not
result in creation of any “intangible asset”, as neither the
transferor company nor the Assessee had paid any money
to the distributors for giving them distributorship of
dealing in the products of the Assessee.
The Bangalore ITAT alleged that it was an ingenious
attempt by the Assessee to claim higher depreciation and
avoid payment of tax in the hands of the transferor or
business by claiming to be a slump sale transaction and
that it was nothing but a colorable device adopted with an
intention of tax avoidance and the principles enunciated
by the SC in the case of McDowell & Co. Ltd.22 were
applicable.
2. Disallowance of depreciation on other fixed assets
The Bangalore ITAT held that the ingredients that were
necessary for the purpose of invoking the provisions of
Explanation 3 to section 43(1) of the IT Act were present
in the instant case since; (i) the assets were used by
another person (i.e. BPL Ltd.) for the purpose of his
business, prior to their acquisition by the Assessee; and
(ii) the transaction of acquisition of the business as a
going concern was between two related parties and the
seller had a substantial interest in the Assessee. The
assets were already depreciated in the hands of the
seller, i.e. BPL Ltd. and higher values were assigned by
the Assessee in order to avoid tax liability and, therefore,
the main purpose of transfer of such assets to the
Assessee was for reduction of liability to income tax. The
Bangalore ITAT, therefore, held that the AO was justified in
restricting the allowance of depreciation on other fixed
assets on the value as increased by 25% of the closing
WDV of BPL Ltd. It was also held that the findings given in
respect of depreciation on the “distribution network”
equally hold good even in respect of valuation of
depreciable assets.
SIGNIFICANT TAKEAWAYS
In the instant case, the slump purchase transaction and the
valuation exercise have been held to be colorable device to
reduce the income tax liability by claiming depreciation on
enhanced costs.
It is pertinent to note that since BPL Ltd. and the Assessee
were related parties, the valuation undertaken by the valuer
in respect of the intangible asset (i.e. “distribution network”)
was not accepted by the IRA. It must be noted that the
above inference was drawn by the AO based on his
“suspicion” and without undertaking an independent
valuation that could have established the valuation
undertaken by the Assessee’s valuer was incorrect and
inflated. The ground with regard to BPL Ltd. and the
Assessee being related parties could be a relevant ground,
but not conclusive. On similar facts, the Delhi ITAT in the
case of Continental Device India Ltd.23, following the
observations of the Gujarat HC in the case of Ashwin
Vanaspati Industries24, held that the valuation report issued
by a registered valuer should not be questions without
bringing any evidence on record that establishes that the
valuation was not appropriate. It was further held that once
there is a report by the registered valuer, it is incumbent
upon the authority to dislodge the same by bringing
adequate material on record in the form of departmental
valuation report because in the absence of the same, a
technical expert’s opinion cannot be dislodged by way
authority by merely ignoring the same. In another case of
Nirma Industries (Pvt.) Ltd.25, the Ahmedabad ITAT frowned
upon the action of the AO of ignoring the valuation reports
obtained from various technical experts and trying to do the
valuation himself instead of obtaining a departmental
valuation report since the AO cannot be construed to be a
technical expert for the purposes of valuation of the
underlying asset.
However, in the present case, the ITAT seems to have
accepted the opinion of the AO that the assets have been
over-valued even in the absence of any adequate material in
the form of departmental valuation report. It will be
interesting to see whether the Assessee would prefer an
appeal before the HC and how the HC would view this
decision of the ITAT.
Another issue that requires examination is whether a
“distribution network” amounts to an intangible asset within
the meaning of Explanation 3 to section 32(2)26 of the IT
Act. In the case of Hindustan Coca Cola Beverages (Pvt.)
Ltd.27, the assessee contended that its claim for
depreciation on goodwill was on the basis that it has paid
the said amount for marketing and trading reputation,
BACK
22. McDowell & Co. Ltd. v. CTO (1984) 154 ITR 148 (SC).
23. Continental Device India Ltd. v. ACIT (2015) 63 taxmann.com 364 (Delhi ITAT).
24. Ashwin Vanaspati Industries v. CIT (2002) 255 ITR 26 (Gujarat HC).
25. Nirma Industries (Pvt.) Ltd. v. DCIT (2014) 148 ITD 126 (Ahmedabad ITAT).
26. Assets shall mean; (i) tangible assets, being…… ; (ii) intangible assets, being know-how, patents, copyrights, trademarks, licenses, franchises or any
other business or commercial rights of similar nature.
27. CIT v. Hindustan Coca Cola Beverages (Pvt.) Ltd. (2011) 198 Taxman 104 (Delhi HC).
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BACK
trading style and name, territory know-how and information
on territory; that it included the cost of know-how relating to
acquiring business, customers, database, distribution
network, contract and other commercial rights. While the
decision was on a slightly different note, it indirectly
recognised distribution network to be an intangible asset.
On elaborating a little bit more on commercial rights, the
Delhi HC observed that commercial rights are such rights
which are obtained for effectively carrying on the business
and commerce, as is understood, is a wider term which
encompasses in its fold many a facet. Studied in this
background, any right which is obtained for carrying on the
business with effectiveness is likely to fall or come within
the sweep of meaning of intangible asset. The dictionary
meaning of the terms “business or commercial rights” as
rights of similar nature as know-how, patents, copyrights,
trademarks, licences, franchises, etc. and all these assets
which are not manufactured or produced overnight but are
brought into existence by experience and reputation. They
gain significance in the commercial world as they represent
a particular benefit or advantage or reputation built over a
certain span of time and the customers associate with such
assets. Accordingly, the distribution network may fall within
the ambit of intangible asset. However, without even
discussing this aspect, the Bangalore ITAT seems to have
concluded that a distribution network cannot be construed
to be an intangible asset. However, it is also possible that
the ITAT was swayed by the facts and circumstances of the
case on the ground that there have been no transfer of
distribution network and thus, the views expressed herein
may have been in the context of the instant case. It will have
to seen whether other judicial authorities and Courts would
place their reliance on this decision.
Further, the Bangalore ITAT has relied on the SC decision in
the case of McDowell & Co. Ltd. (supra) and therefore, held
that the Assessee has adopted a colorable device with an
ultimate intention of avoiding taxes. The observations of the
Bangalore ITAT with regard to the valuations of tangible and
intangible assets acquired pursuant to the slump purchase
transaction from BPL Ltd. (being a related party) are far
reaching and thought provoking. It raises several questions
like; whether every transaction between related parties
would be questioned; whether the valuations undertaken by
an independent registered valuer could be rejected without
any cogent basis; etc.
It will, indeed, be interesting to see how these aspects
would be dealt with in the light of the GAAR, which are
expected to come into force from April 01, 2017.
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INDIAN SUBSIDIARY
CONCLUDING
CONTRACTS ON
BEHALF OF THE
FOREIGN ENTITY
CONSTITUTES
DEPENDANT AGENT PE
In Carpi Tech SA28, the Chennai ITAT held that the subsidiary company formed
by a foreign company and represented by a director of the Indian subsidiary
would constitute a dependant agent permanent establishment (“DAPE”) in
terms of Article 5(5) of the India-Swiss DTAA. It further held that the benefit
provided in terms of Article 5(2)(j) of the India-Swiss DTAA (i.e. exemption from
PE when the six months threshold limit is not breached) could not be invoked,
since the activity performed by the subsidiary company would not strictly fall
under the ambit of ‘building site or construction, installation or assembly
project’.
FACTS
Carpi Tech SA (“Assessee”) was a company incorporated under the laws of
Switzerland and specialized in geo composite membrane water proofing and
drainage systems for dams, canals, tunnels and other hydraulic structures.
During the relevant year i.e. AY 2008-09, the Assessee commenced the work
awarded by National Hydro Power Corporation Ltd. (“NHPC”) to provide for PVC
geo membrane water proofing in Tanakpur power channel in Uttarakhand. The
receipt from the project to the tune of INR 11,95,56,285/- was claimed as
exempt from tax in India by the Assessee. Assessee claimed that there was no
PE in India in terms of Article 5(2)(j) of the DTAA since the activities performed
by the Assessee fell within the ambit of ‘building site or construction,
installation or assembly project’ and the number of days spent for executing
the NHPC project was less than 40 days, which was less than the prescribed
threshold limit of 6 months.
During the course of scrutiny assessment, the AO took into consideration the
other projects undertaken by the Assessee during the earlier years, i.e. 2004-
05 and 2005-06, for Tamilnadu Electricity Board (“TNEB”) at the Kadambari
dam and held that the subsidiary formed by the Assessee company, M/s.
Carpi India Waterproofing Specialists India Pvt. Ltd. (“CIWSPL”), represented
by Mr. V. Subramaniam has been acting as Indian representative of the
Assessee company and, therefore, CIWSPL / Mr. V. Subramaniam constituted
DAPE of the Assessee in terms of Article 5(5) of the India-Swiss DTAA.
While holding so, the AO refuted the arguments of the Assessee that there was
a substantial time-gap of 3 years between the project performed for TNEB and
the instant project performed for NHPC and that the project performed for
NHPC was for less than 40 days. The AO alleged that the intervening period of
3 years was used for bagging other projects as evident from the letter dated
August 06, 2007, which was not only signed by Mr. V. Subramaniam but also
evidenced the visits undertaken by him to the site and his interactions with the
senior officials. The AO was of the view that the office address used by
CIWSPL / Mr. V. Subramaniam constituted fixed place of business and further
that since the CIWSPL / Mr. V. Subramaniam had been presented before the
NHPC as the Indian representative of the Assessee and acted as the face of
the Assessee, they constituted a DAPE in terms of Article 5(5) of the India-
Swiss DTAA.
The Assessee approached the Dispute Resolution Panel
(“DRP”) wherein the DRP observed that Mr. V.
Subramaniam had played an active role in obtaining and
executing the contracts on behalf of the Assessee and it
also took note of the educational qualifications and the
work experience of Mr. V. Subramaniam and concluded
that he was almost exclusively functioning on behalf of
the Assessee and, therefore, constituted dependant
BACK
“Indian subsidiary and its
managing director working
exclusively for the foreign parent
could lead to the establishment
of a PE”
28. Carpi Tech SA v. ADIT (Intl. Taxation) (2016) 76 taxmann.com 101 (Chennai ITAT).
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agent PE. It further confirmed the finding of the AO that Article
5(2)(j) of the India-Swiss DTAA could not be invoked since the
Assessee was unable to demonstrate that it was a mere
passing or casual presence for its activity in India. Accordingly,
the final order was passed against the Assessee against which
an appeal was preferred before the ITAT.
ISSUE
Whether the activities performed by the Indian subsidiary and
Mr V. Subramanium would fall within the ambit of DAPE in
terms of Article 5(5) of the India-Swiss DTAA?
ARGUMENTS/ANALYSIS
The Assessee contended before the ITAT that Mr. V.
Subramaniam, besides being a director of CIWSPL, was also
representing other foreign enterprises and another Indian
company. Further, it was submitted that a specific power of
attorney was executed in favour of Mr. V. Subramaniam vide
agreement dated November 22, 2007, which was subsequent
to the contract which had been awarded to the Assessee on
November 05, 2007. Therefore, Mr. V. Subramaniam did not
have any general on continuous authority to conclude the
contract of behalf of the Assesssee and thus, cannot be
considered as a dependant agent in view of Article 5(6) of the
India-Swiss DTAA.
It further submitted that the ‘invitation of bid’ clearly
prescribes the scope of work as ‘design, manufacture, supply
and installation of exposed impervious PVC geo-composite
membrane’ and that the same fall within the ambit of Article 5
(2)(j) of the India-Swiss DTAA, per which the installation
activities should be continued for a period of 6 months so as
to constitute a PE. Since the project duration in the instant
case was much less than the prescribed time-limit for
constituting the PE, no PE was said to be constituted.
DECISION
The ITAT noted that Mr. V. Subramaniam, the managing
director of CIWSPL, was critical to all aspects of the contracts
through the stages of signing the contract to the execution of
the same. In respect of the arguments put forth by the
Assessee that Mr. V. Subramaniam is an independent agent
who was also acting for other foreign companies, the ITAT held
that Mr. V. Subramaniam represented those companies by the
strength of the consortium agreement dated July 30, 2001
and during the period in question, he was representing only
the Assessee with no activities attributable to the consortium.
The ITAT also took into consideration the fact that there was
no presence of any other employee of the Assessee from
Switzerland and the Assessee was solely relying on the
special skills and knowledge of Mr. V. Subramaniam. Further,
he was performing functions exclusively or almost exclusively
for and on behalf of the Assessee.
The ITAT had also rejected the contention of the Assessee that
activities fell within the ambit of Article 5(2)(j) of the India-
Swiss DTAA by holding that the Assessee had failed to
demonstrate that it was a mere passing, transient or casual
presence for its activity in India and thus, upheld the order of
the lower authorities.
SIGNIFICANT TAKEAWAYS
While the ITAT’s conclusion that the activities carried out by
the Indian subsidiary and it’s managing director exclusively
on behalf of the non-resident Assessee had created DAPE
in India could be treated as fair since the Indian entity was
indeed functioning exclusively on behalf of the foreign
company, including finalization of contracts on behalf of the
foreign entity. However, it is not clear whether the Indian
subsidiary was compensated for its efforts on arm’s length
basis or not. It would have been interesting to note whether
the ITAT reached the same conclusion in case the Indian
subsidiary had been compensated by the non-resident
Assessee on arm’s length basis, especially in light of the
SC’s decision in case of Morgan Stanley29 and the Bombay
HC’s decision in the case of Sony Entertainment
Television.30
Moreover, its other conclusion that in order to constitute an
‘Installation PE’ in terms of Article 5(2)(j) of the India-Swiss
DTAA, the business presence should merely be “passing,
transient or casual”, requires further consideration. The ITAT
seems to have concluded that ‘Installation PE’ in terms of
the DTAA is a specific provision as compared to the PEs
encompassed under Articles 5(1) or 5(5) of the DTAA and
that the specific provisions always take precedence over the
generic provisions.
In other words, so long as the activity falls within the ambit
of ‘building site or construction, installation or assembly
project’ and a separate consideration had been determined
for the same, it ought to have been governed in terms of
the specific provision enshrined, i.e. Article 5(2)(j) of the
India-Swiss DTAA. The Delhi ITAT in the case of Hyundai
Heavy Industries Co. Ltd.31 had held that the project office
which was in existence for several years, manned by the
senior officials and also acted as the brain behind the
execution of the contract, would still not constitute a PE for
the non-resident company in India since the activities
undertaken by the assessee fell within the ambit of ‘building
site or construction, installation or assembly project’ and the
minimum threshold limit prescribed for the constitution of
‘Installation PE’ has not been satisfied. Similar view had
been held in Cal Dive Marine Construction.32
BACK
29. DIT(Intl.Taxation) v. Morgan Stanley & Co. (2007) 292 ITR 416 (SC).
30. SET Satellit (Singapore) Pte. Ltd. v. DDIT, Intl. Taxation (2008) 307 ITR 205 (Bombay HC).
31. DCIT v. Hyundai Heavy Industries Co. Ltd. (2009) 31 SOT 482 (Delhi ITAT).
32. In re Cal Dive Marine Construction (Mauritius) Ltd. (2009) 315 ITR 334 (AAR-New Delhi).
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Professor Klaus Vogel in his treatise on Double Taxation
Conventions has also succinctly explained that if the
‘Installation PE’ is ruled out in terms of minimum threshold
limit prescribed therein, other PEs as specified under other
Articles (i.e. Articles 5(1), 5(2) as well as 5(5)) of the DTAA
should automatically be ruled out too.
In view of the same, it can be respectfully stated that the
decision rendered by the Chennai ITAT may have to be
reconsidered.
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CONSIDERATION FROM
RIGHTS GIVEN TO HOST,
STAGE AND PROMOTE
RACING EVENT NOT
TAXABLE AS ROYALTY
In Formula One World Championship Ltd.33, the Delhi HC held that the
payments made to the non-resident for rights acquired to host, stage and
promote Formula One World Race Championship (“F1 Championship”) racing
event in India was not ‘royalty’, however, the consideration was held to be
taxable in India as ‘business income’ of the non-resident since the non-
resident had established a PE in India.
FACTS
Formula One World Championship Ltd. (“FOWC”/ “Appellant No.1”), a UK tax
resident; Fédération Internationale de l’Automobile (“FIA”), the regulatory body
for auto sports events; and Formula One Asset Management Ltd (“FOAM”)
entered into agreements, under which FOAM licensed commercial rights in the
F1 Championships held all across the world to FOWC for a period of 100 years,
effective from January 1, 2011.
In India, FOWC entered into a Race Promotion Contract (“RPC”) dated
September 13, 2011, with Jaypee Sports International Ltd.
(“Jaypee”/”Appellant No. 2”), by which FOWC granted Jaypee the right to host,
stage and promote the Formula One Grand Prix racing event in India (“F1 Race
India”) for a consideration of USD 40 million. Simultaneously, an Artwork
License Agreement (“ALA”), contemplated under the RPC, was entered into
between FOWC and Jaypee on the same day, permitting restricted use of
certain intellectual property (“IP”) belonging to FOWC, for a consideration of
USD 1. The RPC of 2011 was preceded by another RPC of 2007 between
FOWC and Jaypee.
FOWC and FIA had also entered into contracts (“Concorde Agreement”) with
participating teams (known as “constructors”), where the participating teams
bound themselves to participate only in the racing events on the official racing
calendar set by the FIA. The parties also agreed that FIA would grant exclusive
right to exploit commercial rights in the F1 Championship. Jaypee had also
entered into commercial agreements with three of FOWC’s subsidiaries
independently.
The Appellants approached the AAR seeking an advance ruling on inter alia,
whether the consideration receivable by FOWC, outside India, in terms of RPC
was royalty or not under Article 13 of the India-UK DTAA and whether FOWC
had a PE in India under Article 5 of the India-UK DTAA.
On the first question, the AAR ruled that the ALA, though signed separately,
was integral to the RPC. It was on the basis of the ALA that Jaypee was able to
organise the event and had used all IP belonging to FOWC necessarily required
to stage, host and promote the event. Insufficiency of consideration in the ALA
did not diminish its prime importance in the context of use of IP, which was, in
effect the dominant intention of the parties. Therefore, irrespective of the
nomenclature in the agreement, the IP had been fully used by Jaypee. Thus,
payments made for the use of IP was in the nature of
royalty.
However, on the question of constitution of PE, the AAR
ruled that FOWC was a commercial rights holder and had
to be necessarily involved to facilitate the work relating to
the event so that required specifications for F1 Race
India are mantained in design and building of the circuit.
This does not mean that all entities, which got access to
the circuit have constituted a PE. Further, it cannot be
BACK
“Even if the premises are made
available to the non-resident for
a short duration, considering the
nature of activity, exclusivity of
access, period for which it is
accessed and probable repetition
in future, it may constitute a fixed
place PE.”
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33. Formula One World Championship Ltd. v. CIT (International Tax) (2016) 76 taxmann.com 6 (Delhi HC).
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said that FOWC was carrying on any business activity through
the event unless it was assumed that the three subsidiaries of
FOWC were acting on behalf of FOWC and were dependent
agents of FOWC, which was not the case. The consideration
paid was for use of certain trademarks and this could not be
equated with having business activity in India. Therefore,
FOWC did not constitute PE either under Article 5(1) or Article
5(5) of the India-UK DTAA.
Aggrieved by the ruling of the AAR, the Appellants and
Revenue filed writ petitions before the Delhi HC.
ISSUES
(i) Whether the payment made by Jaypee to FOWC was in the
nature of royalty, under the India-UK DTAA for the use of
FOWC’s trademark;
(ii) Whether FOWC had a PE under Article 5 of the India-UK
DTAA in the facts of the present case.
ARGUMENTS/ANALYSIS
The Appellants argued that the rights given to Jaypee under
the RPC were a bundle of rights, the basic objective of which
was to enable Jaypee to host the F1 Race India. The
permission to use the trademark for limited purpose of
advertising the event was incidental to the grant of the
principal right, i.e., hosting of the event. Jaypee had no
independent right of commercial exploitation of the
trademarks. Therefore, a consideration of only USD 1 was
payable in relation to the limited use of trademark. The
dominant purpose of the payment to FOWC under the RPC
was to secure the right to host, stage and promote the event
at its circuit as its own commercial venture and not for use of
any IP. The ALA did not confer any additional rights on Jaypee.
It was incidental to RPC and its purpose was to control and
limit the use of marks for sole purpose of promoting the event.
Further, in case of termination of the RPC, Jaypee was to pay
full contractual amount, i.e. USD 40 million, in the year of
termination and in the subsequent year as well. However, the
right to use trademarks, logos and IP rights ceased instantly
the moment termination takes place. This clearly indicated
that consideration paid to FOWC was for the privilege of
hosting and staging the F1 Race India and not for obtaining
the IP rights.
On the question of PE, the Appellants argued that for
constitution of PE it was essential that premises or place
should have been at the disposal of the enterprise. There was
nothing in the RPC or any agreement with FOWC, whereby a
fixed place was ever available with FOWC at its disposal.
Jaypee did neither lease the stadium, nor its premises nor any
part thereof to FOWC. The access provided to FOWC or its
affiliates did not mean that FOWC had a fixed place of
business, as no part of the income generating activity of FOWC
actually arose in India. The entitlement to live feed from the
event used by FOWC did not mean that any part of its
business was transacted in India. Further, the contracts
entered into by Jaypee with three of FOWC affiliates were
independent bargains, and concluded on principal to principal
basis. Thus, there can be no Agency PE. Also, the reliance
placed by AAR on the Golf in Dubai34 case was inappropriate
as in that case the premises were in fact leased for a period of
use, which is not the case in present.
On the other hand, the IRA contended that the terms of ALA
and RPC reflected that the payment of USD 40 Millions were
to enable Jaypee the use of Formula One (“F1”) trademark
and logo. These marks could have been figured easily on the
trackside advertisements and tickets that were printed. The
use of the logo to promote the event in effect meant the use
of F1 marks. The nomenclature on the terms of an agreement
should not always be determinative of the true nature of the
transaction, which, in this case was to permit the use of the
F1 marks. Further, the revenue contended that the ‘Formula
One’ trademark had been acquired from FIA for substantial
consideration. It was unrealistic that a mark acquired for hefty
consideration, was licensed to Jaypee without consideration.
Also, considering the relative ignorance of crowd in India for
various other motor sporting events in India, which hardly
attracts any audience, the crowd which had attended race at
the circuit or watched TV at home were drawn towards the
name ‘Formula One’ that they were familiar with. Therefore,
revenue arising from commercial rights like advertisements,
sale of tickets, broadcasting rights was all attributable to the
name of the event.
On the question of PE, the IRA argued that FOWC played a
dominant role from the inception, i.e., inclusion of event in a
circuit, till the conclusion of event itself, i.e., the F1 race on
any circuit. Buddh Circuit was built to suit the specifications
needed for a Formula One Race. The entire circuit and areas
in the premises were booked for 2 weeks before and 1 week
after the F1 Race India and no other event could have taken
place at that time. FOWC or its personnel or agents had full
access to every part of the circuit during this period. Further,
even though the right to promote, host and stage the event
ostensibly was that of the Jaypee, it could not, in real sense of
the term, exploit its rights, as under the RPC it was bound to
contract out those rights to the subsidiaries of FOWC. Most
importantly, the entire ownership of live feed and the right to
exploit it through sports contracts for media, television
network, gaming, rights etc. were exclusively with FOWC.
Therefore, FOWC was carrying out a business activity, which
yielded income in the form of consideration for facilitating the
event, its inclusion in the FIA calendar and the revenues
derived from the exploitation of commercial rights.
DECISION
The Delhi HC perused various clauses of the RPC, such as
FOWC’s obligations and warranties, access to circuit prior to
event, competitor/media facilities, access to restricted areas,
insurance, filming/recording at the event, IP, accreditation for
BACK
34. In re: Golf in Dubai (2008) 306 ITR 374 (AAR-New Delhi).
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filming/recording and circuit advertising and ruled accordingly
on the following issues:
1. Royalty
Under section 29 of the Trade Marks Act, 1999, prior
consent of the proprietor is required for using the
trademark even for advertisement purposes. To serve this
purpose, ALA was entered between FOWC and Jaypee
which entitled Jaypee to limited usage of trademarks, i.e.,
only for advertisement and promotion of F1 Race India
and restricted Jaypee on usage of such mark, i.e. for any
commercial purposes. The OECD Commentary states that
payments solely made in consideration for obtaining
exclusive distribution rights of a product or service in a
given territory cannot be construed as royalty. Further,
the HC noted various provisions of the RPC and ALA under
which FOWC had exclusive rights to exploit the
commercial rights in the F1 Race India. Most importantly,
the HC noted that under the RPC, in case of termination of
the RPC, Jaypee was obliged to pay full contractual
amount, i.e. USD 40 Million, in the year of termination and
in subsequent year as well. However, the right to use
trademarks, logos and IP rights ceased instantly, the
moment termination took place i.e. Jaypee cannot use the
trademarks independent of the staging and hosting of the
event. Based on the abovementioned factors, the HC
observed that amount paid by Jaypee to FOWC under the
RPC is for privilege of hosting and staging the
championship and not for licensing the IP rights. As an
event promoter, Jaypee had to publicize the F1 Race India
and it was bound to use F1 trademarks, logos etc.
However, it was not authorised to use the marks on any
merchandise or services offered by it. This indicated that
the use of trademark is purely incidental.
In Sheraton International Inc35, the Delhi HC had held that
when the main work of the foreign collaborator was to
render services in relation to advertisement, publicity and
sales promotion, its incidental use of the trademark does
not amount to receipt of royalty. Further, relying on
Ericsson A.B.36 and other above-mentioned factors, the
Delhi HC held that the lump-sum consideration payable,
which is not based on or connected with the extent of the
use of IP rights, to FOWC by Jaypee would not constitute
royalty under Article 13 of the India-UK DTAA. The
definition of royalty under section 9(1)(vi) of the IT Act is
significantly broader than that set out in the India-UK
DTAA. However, since the payment made under RPC were
not for the use of trademark or IP, but for the grant of the
privilege of staging, hosting and promoting the event, it
will not constitute royalty even under the IT Act.
2. PE exposure
The HC noted that Professor Klaus Vogel in his
commentary37 has explained that the main features of
Article 5(1) are: (a) existence of an enterprise; (b) its
carrying on of a business; (c) existence of a place of
business, the nature of such place being fixed; and (d)
through which (i.e., through the place) the business
should be carried on. The HC observed that the question
of PE exposure under Article 5(1) revolved around the fact
as to (i) whether FOWC carried on business from a fixed
place, if yes, (ii) did it carry on business and commercial
activity in India.
(i) Fixed Place PE
The HC noted that at all material times FOWC had full
access exclusively to the circuit and surrounding
areas, during the event, as well as two weeks prior
and a week succeeding to it through its personnel,
the teams contracted, etc. Further, FOWC could also
dictate who were authorised to enter the areas
reserved for it. A look at all these agreements
together show that Jaypee’s capacity to act was
extremely restricted during the event, and it was
FOWC which played a dominant role. The HC further
noted that even though FOWC’s right to access was
not permanent, the model of commercial transaction
it chose was such that its exclusive circuit access was
up to six weeks at a time during F1 Race India. The
team completed the race in a given place and after its
conclusion moved to another location where a similar
race was conducted. This nature of activity was a
shifting or moving presence. In the opinion of HC, the
presence was fixed, as contemplated under Article 5
(1) given the nature of activity, exclusive access and
the period for which it is accessed. Thus, the
presence is neither ephemeral or fleeting or sporadic.
Also, the contracts tenure for 5 years indicated
repetition.
Thus, based on OECD commentary and Klaus Vogel’s
commentary, since the presence is in a physically
defined geographical area, and though permanence
is only for the relative period of the duration of the
championship, the FI India circuit itself constituted a
fixed place of business.
(ii) Commercial Activities
The HC noted that the FOWC was the exclusive
commercial rights holder for a host of rights. Barring
limited class of rights, like paddock entry, ticketing,
hospitality at the circuit and restricted class of
advertising, all commercial exploitation rights vested
exclusively with FOWC. FOWC was entitled to charge a
BACK
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35. DDIT v. Sheraton International Inc (2009) 313 ITR 276 (Delhi HC).
36. DIT v. Ericsson A.B. (2012) 343 ITR 470 (Delhi HC). It was held that a lump-sum payment which is not based or connected with the extent of used of the
IP rights would not constitute ‘royalties’ within the meaning of the India-UK DTAA.
37. Kluwer Law International (2005).
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fee for the recording, telecasting, broadcasting, and
creation of internet and media rights including data
transmission, and all other such commercially
exploitable rights. Every right which FOWC possessed
was monetised by it and was over and above the USD
40 million paid by Jaypee annually. Each actor, such
as the promoter Jaypee, the racing teams, the
constructing teams and other affiliates played a part
in the event. However, FOWC’s participation and the
undertakings given to it by each of these actors, who
are responsible for the event as a whole, brings out
FOWC’s central and dominant role. The
conceptualisation of the event and the right to decide
the venue and participating teams that are bound to
compete in race shows that entire event, etc. was
organised and controlled in every sense by the terms
set out by FOWC. If Jaypee is the event promoter,
which owns the title to the land of circuit, FOWC is the
commercial rights owner of the event. The bulk of
revenue is earned through media, television and
other related rights, and on the basis of those rights,
is the event itself. All these, in opinion of HC,
unequivocally showed that FOWC carried on business
in India for duration of the race, and for weeks before
and after the race.
Consequently, the HC held that FOWC carried on
business in India under Article 5(1) of the India-UK
DTAA and thus, constituted a PE.
(iii) Agency PE
Further, on the question of Agency PE under Article 5
(4) and 5(5) of the India-UK DTAA, the HC observed
that mere circumstance that the three subsidiaries of
FOWC were dealing independently with Jaypee, is not
sufficient to indicate that the contracts they entered
into and the business they engaged in, were for and
on behalf of FOWC. What is to be shown is that the
subsidiaries had the authority to conclude contracts
on behalf of FOWC and they habitually exercised this
authority. Accordingly, the HC negated the IRA’s
argument of an Agency PE.
3. Withholding taxes
It is trite law based on a SC ruling38 that tax needs to be
withheld only if the sum paid is assessable to tax in India.
Section 195 of the IT Act clarifies that the payment made
by the payer which is liable to tax in India should be
subject to withholding of taxes. Since the Appellant has
been held to have carried on business in India through a
PE at the circuit, payments made under the RPC were
taxable in India as business income. Accordingly, tax is
requited to be withheld at appropriate rates.
SIGNIFICANT TAKEAWAYS
This is a very important decision since it clarifies that in
order to examine the taxability of a particular transaction,
the transaction shall have to examined in a holistic manner
and while the payment being made by Jaypee towards
getting the F1 rights could be construed as royalty, it is not
to be construed as royalty after taking into account the
overall arrangement between Jaypee and FOWC. Similarly,
as far as PE is concerned, the HC has clarified that the
duration for which the fixed place is available to the non-
resident is not important. So long as the premises are made
available to the non-resident for the entire duration of the
event and more and the non-resident carries out its
business activities from the said premises, it may constitute
a fixed place PE of the non-resident in India.
Non-residents like FOWC are well advised to plan their
business activities and the rights that they seek from their
Indian counterpart, carefully in light of this decision.
BACK
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38. GE India Technology Centre (Pvt.) Ltd v. CIT (2010) 327 ITR 456 (SC).
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CONSIDERATION PAID
FOR THE PURPOSES OF
ACQUIRING THE
SHAREHOLDING IS NOT
RELEVANT FOR THE
PURPOSE OF
ALLOWING
DEPRECIATION IN VIEW
OF 5TH PROVISO TO
SECTION 32(1) OF THE
IT ACT
In United Breweries Ltd.39, the Bangalore ITAT inter alia held that the
difference between the FMV of assets and the total consideration paid under
the scheme of amalgamation cannot be shown as goodwill by the
amalgamated company and no depreciation is allowable on the same. It
distinguished the decision of the SC in the case of Smifs Securities Ltd.40 by
holding that the SC dealt only with the issue of whether ‘goodwill’ is an
intangible asset or not and that the judgment of SC would not override the
provisions of fifth proviso to section 32(1) of the IT Act.
FACTS
United Breweries Ltd. (“Assessee”) is in the business of production and sale of
beer. During the preceding year, the Assessee had paid INR 180.52 crores to
acquire the shares of the Karnataka Breweries & Distillery Ltd. (“KBDL”) and
thereby KBDL became the 100% subsidiary of the Assessee. Subsequently,
during the year under consideration, the Assessee entered into a scheme of
amalgamation with its subsidiaries – KBDL, London Draft Pubs Pvt. Ltd
(“LDPPL”) and London Pillsner Breweries Pvt. Ltd. (“LPBPL”).
Pursuant to the amalgamation, the Assessee claimed depreciation on goodwill
amounting to INR 62.30 crores, being the difference between the FMV of the
tangible/net current assets of KBDL and the total consideration paid to
acquire the shares of KBDL in the preceding year. In support of the same, the
Assessee furnished the valuation report made by an independent valuer to
determine the FMV of the assets of KBDL.
During the scrutiny proceedings, the AO disallowed the claim of depreciation
on goodwill on the ground that the valuation report had not determined the
valuation of assets in an appropriate manner and further that the Assessee
was not eligible for the depreciation on goodwill in view of the fifth proviso to
section 32(1) of the IT Act. The findings of the AO were confirmed by the CIT(A).
ARGUMENTS/ANALYSIS
Before the ITAT, the Assessee contended that the issue of allowing
depreciation on goodwill had been settled by the SC in the case of Smifs
Securities Ltd.41 and that the valuation of goodwill is nothing but the
differential amount between the consideration paid and the FMV of the
tangible assets. It further contended that the AO had erred in rejecting the
valuation report of the Assessee without assigning the correct value to the
assets and that the replacement method adopted by the valuer was the well
accepted method of valuation which the AO could not reject merely doubting
the same.
On the other hand, the IRA supported the position taken by the AO and argued
that the license had not been valued by the valuer and
there was no basis to value the said license at INR 62.30
crores. Alternatively, it had contended that the claim of
depreciation on goodwill cannot be allowed in view of the
fifth proviso to section 32(1) of the IT Act. Further, the IRA
also referred to Explanation 3 to section 43(1) of the IT
Act and contended that the AO had the power to examine
the value of the assets acquired by the Assessee if (i) the
assets were already in use for business purposes, and (ii)
the AO is of the view that the main purpose of transfer of
such assets was the reduction of income tax liability.
BACK
“Claim of depreciation of the
amalgamated company cannot
exceed the depreciation
permitted to the amalgamating
company on the assets acquired
through amalgamation”
TAX SCOUT | Oct - Dec 2016
39. United Breweries Ltd. v. ACIT (ITA No. 722/Bang/2014, AY 2007-08) (Bangalore ITAT).
40. CIT v. Smifs Securities Ltd. (2012) 348 ITR 302 (SC).
41. Id.
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Thus, the AO was right in determining the value of the goodwill
as NIL since the Assessee had failed to substantiate the value.
In the rejoinder, the Assessee had submitted that when the
goodwill recorded in the books, being the balancing figure of
excess consideration paid over the FMV of the tangible assets,
the provisions of fifth proviso to section 32(1) of the IT Act
would be made applicable and further that the IRA had never
raised this argument before the SC in the above mentioned
case of Smifs Securities Ltd.42
DECISION
The ITAT concurred with the arguments of the IRA that in view
of Explanation 3 to section 43(1) of the IT Act and held that
the AO is empowered to determine the actual cost of the
assets, if he is satisfied that the main purpose of the transfer
of assets was to reduce the tax liabilities arising under the IT
Act. It rejected the contentions of the Assessee that goodwill
being the differential value between total consideration paid
and the FMV of the assets acquired cannot be disturbed, by
holding that allowing such claim would render the provisions
of Explanation 3 to section 43(1) of the IT Act redundant. It
held that if the contentions of the Assessee were to be
allowed, every excess claim of depreciation in cases of
transfer, succession or amalgamation would become valid on
account of goodwill.
Moreover, it also held that in view of the fifth proviso to
section 32(1) of the IT Act, depreciation allowable in cases of
succession, amalgamation, merger or demerger should not
exceed the depreciation allowable had the succession not
taken place. In other words, allowance of depreciation to the
successor/ amalgamated company in the year of
amalgamation would be on the WDV of the assets in the
books of the amalgamating company and not on the cost of as
recorded in the books of amalgamated company. It further
noted that in view of the fifth proviso to section 32(1) of the IT
Act, valuation of assets becomes irrelevant.
On this premise, the ITAT held that since the subsidiary
company had not claimed any depreciation on goodwill, the
Assessee, being the amalgamated company, cannot claim or
be allowed to claim the depreciation on the assets acquired in
the scheme of amalgamation more than the depreciation
allowable to the amalgamating company.
As regards the decision of SC in the case of Smifs Securities
Ltd.43, the ITAT had held that the said ruling of the SC was only
on the point whether the goodwill falls in the category of
intangible assets or any other business or commercial rights
of similar nature as per the provisions of section 32(1) of the
IT Act and that there was no quarrel on the eligibility of
depreciation on goodwill. It went on to hold that the decision
of SC would not override the provisions of the fifth proviso to
section 32(1) of the IT Act and that the consideration paid by
the Assessee to acquire the shareholding of the subsidiary
company is not relevant for the purpose of allowing
depreciation on the assets taken on amalgamation.
SIGNIFICANT TAKEAWAYS
The controversy surrounding availability of depreciation on
goodwill appeared to have been put to rest by the decision
of Smifs Securities Ltd (supra), which was also relied on by
the Kerala HC and Delhi HC in B. Raveendran Pillai44 and
Hindustan Coca Cola Beverages (P.) Ltd45 respectively.
It is also pertinent to note that the decision of the Panaji
ITAT in the case of Chowgule46, which denied depreciation
on goodwill on amalgamation based on Explanation 7 to
section 43(1) of the IT Act, and the decision of Mumbai ITAT
in the case of Toyo Engineering India Ltd.47, which denied
the depreciation on goodwill by holding that the same is
mere book entry recording difference between the
consideration paid on amalgamation by way of cancellation
of investments and the net book value of the assets and
liabilities, had been reversed by the Bombay HC48 in view of
decision of SC in Smifs Securities Ltd. (supra). Furthermore,
recently the Ahmedabad ITAT in the case of Zydus Wellness
Ltd.49 allowed depreciation on goodwill arising out of
amalgamation following the abovementioned decision of the
SC.
However, the instant decision seems to have reopened the
issue once again by holding that the SC addressed only the
issue of whether goodwill is eligible for depreciation under
the provisions of the IT Act and not whether the goodwill can
arise out of amalgamation, disregarding the point that the
facts considered by the SC were concerning goodwill arising
out of amalgamation only.
The primary question that arises is whether the Assessee
could have indeed recognized any goodwill for the excess
consideration paid on acquisition of shares, in the
subsequent year, at the time of amalgamation with its 100%
subsidiary. Further, will goodwill be created at the time of
amalgamation given that no consideration is paid by the
parent company for the amalgamation and the Assessee
would have held shares of the subsidiary as an investment?
The availability of such goodwill for an amalgamation
between a parent and its wholly owned subsidiary will itself
be the moot issue, given that no consideration is paid by the
parent for the amalgamation. In the instant case, it must be
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42. Id.
43. Id.
44. B. Raveendran Pillai v. CIT (2011) 332 ITR 531 (Kerala HC).
45. CIT v. Hindustan Coca Cola Beverages (Pvt.) Ltd. (2011) 331 ITR 192 (Delhi HC).
46. Chowgule & Co. (Pvt.) Ltd v. ACIT (2011) 131 ITD 545 (Panaji ITAT).
47. DCIT v. Toyo Engineering India Ltd. (2013) 33 taxmann.com 560 (Mumbai ITAT).
48. Toyo Engineering India Ltd. v. DCIT 2016-TIOL-244-HC-MUM-IT (Bombay HC).
49. ACIT v. Zydus Wellness Ltd TS-679-ITAT-2016 (Ahd) (Ahmedabad ITAT).
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noted that the Assessee first acquired a third party entity
(i.e. KBDL) for a consideration in the preceding year, which
was in excess of the FMV of the tangible assets of KBDL and
then claimed the differential as goodwill at the time of
amalgamation, during the year under consideration.
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In Siemens Public Communication Pvt. Ltd50, the SC held that the voluntary
payments received by a loss making Indian company from its non-resident
parent company, in order to secure and protect the capital investment in the
Indian company, was in the nature of capital receipt in the hands of the Indian
company and hence not taxable.
FACTS
Siemens Public Communication Pvt. Ltd. (“Assessee”) was engaged in the
business of manufacturing digital electronic switching systems, computer
software and also provided software services. During the previous years
relevant to the AYs 1999-2000 to 2001-2002, it received certain amounts
from its parent Company in Germany, i.e. Siemens AG (“Parent”), which was
also the Assessee’s principal shareholder. During the course of assessment
proceedings, the Assessee explained that the said amounts were in the nature
of “subvention” received from the Parent because the Assessee was a
potentially sick company and its capacity to borrow had reduced, leading to
the shortage of working capital. Further, the Assessee stated that the
subvention amounts paid by the Parent was to make good the loss incurred by
it and the receipt of subvention monies was in the nature of capital receipt,
and was not be treated as a revenue receipt.51
The AO vide his order had rejected the contention of the Assessee and held
that the subvention amount would be a revenue receipt. The CIT, however,
reversed the order of the AO treating the receipt of grant as capital receipt.
The ITAT confirmed the findings of the CIT and observed that the capital
infused by Parent was to augment the capital base and to improve the net
worth, which had been eroded due to losses suffered by the Assessee. If the
amount so paid to the Assessee was to be treated as revenue income, it would
amount to taxing the Parent itself. Further, the ITAT observed that the
subvention amounts paid to a subsidiary by its Parent is an amount paid
within the same group and is not in the nature of income for the recipient so
as to be treated as taxable income as a revenue receipt.
Aggrieved, the IRA appealed to the Karnataka HC where it was argued that the
amounts paid by the Parent to the Asseessee was in the nature of revenue
receipt and was paid, not only to make good the loss, but also to allow the
Assessee to carry on with its operations. IRA further
argued that the subvention amount was paid in AYs 1999
-2000 to 2001-02. However, the Assessee had suffered
loss only in AY 1999-2000, whereas, it was profitable in
AY 2000-01 and AY 2001-02. The IRA placed reliance on
the cases of the SC in Sahney Steel52 and Ponni Sugars53
in support of its submissions.
On the other hand, the Assessee argued that having
regard to the finding of the CIT and the ITAT, no
BACK
“Voluntary payments made by
parent to loss making subsidiary
is in order to protect capital
investments and hence, shall be
construed as a capital receipt.”
50. Siemens Public Communication Networks Pvt. Ltd. v. CIT Bangalore (Civil Appeal No. 11934, 11936 & 11937 of 2016, Order date - December 7, 2016)
(SC).
51. CIT v. Siemens Public Communication Networks Ltd. (2014) 41 taxmann.com 139 (Karnataka HC).
52. Sahney Steel & Press Works Ltd., Hyderabad v. CIT (1997) 7 SCC 764 (SC). In this case, the SC referred to the salient features of various schemes
formulated by Central/State Governments under which subsidies were availed and received by the assessee and also the purpose of said subsidy and
held that the incentive or subsidy received by way of refund of sales tax, power and electricity consumed on production, water rate etc, are to enable
assessee to run his business profitably and should be treated as revenue receipts. Incentive and subsidy received were in the nature of production
expenses, after the production has started, and were not directly or indirectly for setting up of industries and were in nature of revenue receipt.
53. CIT v. Ponni Sugars and Chemicals Ltd. (2008) 9 SCC 337 (SC). In this case, the SC noted that the eligibility condition in the Scheme under which
subsidy was received was that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial
expansion of existing units. Thus, the SC by placing reliance on the principle laid down in the case of Sahney Steel (supra) held that if the object of the
Subsidy Scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of subsidy was on capital account.
Therefore, it is the object for which subsidy/ assistance is given which determines the nature of subsidy/ assistance received. The form of mechanism
through which subsidy is given is irrelevant.
VOLUNTARY PAYMENTS
FROM PARENT
COMPANY TO PROTECT
CAPITAL INVESTMENT
MADE BY IT IN
SUBSIDIARY COMPANY
IS IN THE NATURE OF
CAPITAL RECEIPT
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substantial question of law was involved and the appeal
should be rejected. Further, the Assessee contended that the
judgments relied upon by the IRA related to the grant of
subsidy and incentives and are not applicable on the facts of
the present case.
The Karnataka HC, reversed the order of the ITAT and held
that the subvention amount was not only to make good the
loss, but also to assist the Assessee in carrying on the
business more profitably. The Karnataka HC placed reliance
on the principle laid down by the SC in the case of Sahney
Steel (supra) and Ponni Sugars (supra), where it was held that
unless grant-in-aid received by an assessee is utilized for
acquisition of an asset, the same must be understood to be in
the nature of revenue receipt. The HC also noted that the
Assessee had suffered a loss only in AY 1999-2000, and
thereafter, in AY 2000-01 and 2001-02, the Assessee had
made a profit. The HC emphasized that the objective of the
relevant financial assistance determines the nature of
assistance. In other words, the character of the receipts in the
hands of the Assessee has to be determined with respect to
the purpose for which the payment was made. The HC held,
therefore, that the financial assistance is extended for
payment of the loan undertaken by the Assessee for setting
up a new unit or for expansion of existing business then the
receipt of such aid could be termed as capital in nature. If not,
where the assistance is extended to run the business more
profitably or to meet recurring expenses, such payment will
have to be treated as revenue receipt. Therefore, it was held
that the receipt of subvention amounts in the instant case was
in the nature of revenue receipt. Aggrieved by the decision of
the Karnataka HC, the Assessee filed a SLP in the SC.
ISSUE
Whether subvention received from Parent to its loss making
subsidiary was capital receipt or revenue receipt in the hands
of receiver.
DECISION
Granting the SLP filed by the Assessee, the SC distinguished
the facts in the instant case, from the facts in the case of
Sahney Steel (supra) and Ponni Sugars (supra) where
subsidies, which were in the nature of grant-in-aid, received by
the assessee from the public funds and not by way of
voluntary contribution by the parent company. The voluntary
payments made by the Parent to its loss making assessee
could be understood to be a voluntary contribution by the
parent company in order to protect the capital investment of
the Assessee. Therefore, it was held that the payment made to
the Assessee was in the nature of capital receipt. The SC
further affirmed the view of Delhi HC in Handicrafts and
Handlooms Export Corporation of India, where it was held that
the payment of grant by a parent company to its loss making
subsidiary was not during the course of trade or performance
of trade. The intention and purpose behind the payment was
to secure and protect the capital investment made by parent
in the company. Therefore, the receipt was classified as a
capital grant and not in the nature of trading receipt and
accordingly held that it is not taxable in the hands of the
subsidiary.
SIGNIFICANT TAKEAWAYS
It is trite law that not every receipt is liable to tax under the
IT Act. The taxability of a receipt depends on whether a
particular receipt is revenue or capital in nature, with latter
typically not being liable to tax. The question of whether
payments received from a foreign parent by an Indian
subsidiary is in the nature of revenue or capital could
depend on the facts of the particular case and the purpose
for which such amount was received.
Taxability of subvention amounts by parent to its loss
making subsidiary had been debated by the Courts before55
and such amounts have been held to be in the nature of
capital receipts. However, the Karnataka HC, relying on the
rulings of the SC in Sahney Steels (supra) and Ponni Sugars
(supra), which were delivered in a different factual context,
had held the subvention to be assistance to assessee for
carrying on the business profitably. The Delhi HC in the case
of Handicrafts and Handlooms Export Corporation56 had
explained that there is a basic difference between grants
made by the Government to an assessee, with a view to
help the assessee in trade or to supplement its trading
receipts, and a case of a private party, like a parent
company, agreeing to make good the losses incurred by an
assessee on account of mutual relationship that subsists
between them. The former is treated as revenue receipts
because the subsidy reaches the trader in that capacity, and
is made in order to assist the assessee in carrying on the
trade. The latter is treated as capital receipt because the
intention and the purpose behind the said amount is to
secure and protect the capital investment made. This
decision by the SC has brought finality to this issue and the
taxpayers may now be in a position to fund their loss making
subsidiaries without worrying about the tax consequences.
The recipient entity may, however, will have to examine the
applicability of MAT, should such amounts be credited to its
profit and loss account.
BACK
54. CIT v. Handicrafts and Handlooms Export Corporation of India Ltd. (2014) 49 taxmann.com 488 (Karnataka HC).
55. Handicrafts & Handloom Export Corporation of India v. CIT (1983) 140 ITR 532 (Delhi HC); CIT v. Indian Textile Engineers (P.) Ltd. (1983) 141 ITR 69
(Bombay HC); CIT v. Stewards & Lloyds of India Ltd. (1986) 28 Taxman 381 (Calcutta HC); DCIT v. Lurgi India Co. Ltd. (2008) 114 ITD 1 (Delhi ITAT); CIT
v. Deutsche Post Bank Home Finance Ltd. (2012) 24 taxmann.com 341 (Delhi HC).
56. CIT v. Handicrafts and Handlooms Export Corporation of India Ltd. (2014) 49 taxmann.com 488 (Karnataka HC).
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LEVY OF ENTRY TAX
DOES NOT RESTRICT
FREEDOM OF TRADE
AND COMMERCE OR
OTHER PROVISIONS
FOR INTER-STATE SALE
In Jindal Stainless Steel57, the SC Constitution Bench by a majority of 7:2
upheld the constitutional validity of entry tax stating that the States were well
within their right to design their fiscal legislations as long as the law was not
discriminatory, and restricted the entry of goods within the State.
FACTS
Jindal Stainless Steel Ltd. and others (“Petitioners”) had moved plea in their
respective HCs, challenging the levy of entry tax imposed by the respective
states on movement of goods from one state to another. The challenge was on
the grounds that the entry tax legislation is contrary to the freedom of trade
and commerce as guaranteed under Article 301 of the Constitution of India,
and that the levies were discriminatory and violative of Article 304(a) of the
Constitution of India as well as there was an absence of Presidential sanction
under Article 304(b) of the Constitution of India. The matters were referred the
five Judge Bench, and thereafter referred to a nine Judge Bench in 2010.
ISSUES
1. Whether the levy of a non-discriminatory tax per se constituted violation of
Article 301 of the Constitution of India?
2. What was the test for determining whether the tax or levy was
compensatory in nature?
3. If yes, whether a tax, which is compensatory in nature, could violate Article
301 of the Constitution of India?
4. Whether the State enactments relating to levy of entry tax had to be
tested with reference to both Article 304(a) and Article 304(b) of the
Constitution and whether Article 304(a) was conjunctive with or separate
from Article 304(b) of the Constitution?
ARGUMENTS/ANALYSIS
The Petitioners argued that the compensatory tax theory (“Compensatory Tax
Theory”) propounded by the seven Judge Bench of SC in Automobile
Transport58 had no legal basis or constitutional sanction and was neither
acceptable nor workable. It was argued that the State Legislatures had taken
umbrage under the Compensatory Tax Theory and declared the fiscal levies
imposed by them to be compensatory in character and claimed the same to be
outside the mischief of Article 301 of the Constitution of India, thereby
becoming immune from all the challenges on the ground of these taxes being
unreasonable restrictions on the right to free trade and commerce.
The Petitioners also submitted that in the absence of any provision against
discriminatory taxation within a State must be understood
to mean that taxes would generally be restrictions and
unless the State took recourse to Article 304(b) of the
Constitution of India they could not levy such taxes upon
trade and commerce within their territorial limits.
The Petitioners submitted that goods coming from
outside the State for sale are being subjected to an entry
tax at a rate different from the rate at which goods
BACK
Indirect Tax
“The levy of entry tax on import of
goods within the territory of a
State cannot be held to be
unconstitutional as long as it was
not held to be discriminatory and
a restriction on trade and
commerce.”
57. Jindal Stainless Steel v. State of Haryana, 2016-VIL-66-SC-CB (SC).
58. Automobile Transport (Rajasthan) Ltd. etc. v. State of Rajasthan & Ors, 1962-VIL-07-SC (SC).
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manufactured within the taxing state are taxed, and this would
amount to discrimination.
The Petitioners further argued that an unreasonably high rate
of tax could by itself constitute a restriction offensive to Article
301 of the Constitution of India.
However, the department argued that power to levy taxes is a
sovereign power that remains totally unaffected by Article 301
of the Constitution of India. Free trade, commerce and
intercourse was not, according to the learned counsel, to be
understood as free from any restrictions, leave alone free from
taxes which the State Legislatures were otherwise competent
to levy. In this regard, the department relied on Shah J.’s view
in the case of Atiabari Tea Co.59.
It was further argued by the Petitioner that Article 304(a) of
the Constitution of India forbids discriminatory fiscal
legislation in respect of goods coming from another state and
there was no provision which prevented the States from
levying discriminatory taxes within its territorial limits.
The Petitioners argued that the levy of entry tax on import of
goods from outside the local area in the State would be per se
discriminatory if goods so imported or similar are not
produced or manufactured within the State.
The Petitioners also argued that grant of exemptions and
incentives in favour of locally manufactured/ produced goods
is also a form of discrimination, which was impermissible in
terms of Article 304(a) of the Constitution.
DECISION
1. Question No. 1
The SC examined the scope of power of the State to tax in
detail, and how the power of taxation was inherent in the
sovereign State in light of Article 246 of the Constitution
of India. The SC noted that the States are entitled to raise
money by taxation as they require adequate revenue in
order to discharge its primary governmental functions
efficiently. Hence, the States have the sovereign power to
claim priority in respect of its tax dues.
The SC further observed that exercise of sovereign power
to levy taxes is subject to certain constitutional limitations
which regulates trade, commerce and intercourse within
the territory of India and comprises Articles 301 to 307 of
the Constitution of India.
The SC, in this regard, observed that the power to levy
taxes, being a sovereign power, can only be controlled by
the express provisions of the Constitution of India,
prohibiting the levy, either absolutely or conditionally.
Further, the SC observed that in Automobile Transport
(supra) case, it was held that all taxes, regardless whether
they are discriminatory or otherwise, would constitute an
impediment on free trade and commerce guaranteed
under Article 301 of the Constitution of India, therefore,
taxes per se were totally outside the purview of Article
301 of the Constitution of India. Therefore, taxes would
never constitute a restriction except where the same
operated as a fiscal barrier that prevented free trade,
commerce and intercourse.
The SC further observed that if taxes are compensatory in
character, then such taxes would not offend the
guarantee of free trade, commerce and intercourse under
Article 301 of the Constitution of India, subject to the
condition that a direct and substantial benefit to the tax
payer would have to be shown in order to justify the levy
of compensatory taxes without offending Article 301 of
the Constitution of India. If taxes are eventually meant to
serve larger public good and for running the governmental
machinery and providing to the people the facilities
essential for civilized living, there is no question of a tax
being non-compensatory in character in the broader
sense.
The SC also observed that the concept of compensatory
taxes is difficult to apply in actual practice. It noted that it
has impractical for the courts to check whether tax
amount collected had really used by the State for
providing or maintaining services and benefits to the tax
payer. Similarly, it was equally difficult for the courts to
follow the money trail to determine the same. Hence, the
SC held that the Compensatory Tax Theory was legally
unsupportable and deserved to be abandoned.
Further, with respect to the inter-play between under
Article 304(a) and 304(b) of the Constitution of India, the
SC held that Article 304(a) of the Constitution of India,
specifically recognizes the State Legislature’s power to
impose the levy on goods imported from other States or
Union Territories. The SC held that language of the said
Article is very clear. The expression ‘may by law impose’
certainly cannot be interpreted as an absolute restriction
on the power to tax. The exercise of such power to levy
taxes on goods imported from others State and Union
territories are subjected to the restriction under Article
304(a) of the Constitution of India. The SC, however, held
that it would not detract from the proposition that levy of
taxes on goods imported from other States is
constitutionally permissible so long as the State
Legislatures abide by the limitations placed on the
exercise of that power. Further, Article 304(b) dealt with
imposition of reasonable restriction in public interest,
which must apply to restrictions other than those by way
of taxes. The use of the word ‘and’ between clauses (a)
and (b) cannot be interpreted as an imposition of an
obligation upon the Legislature to necessarily impose a
tax and a restriction together. The SC further rejected the
contention of the Petitioners that the use of the non-
BACK
59. Atiabari Tea Co. Ltd. v. State of Assam & Ors. 1960-VIL-02-SC-LB (SC).
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obstante clause in Article 304 of the Constitution of India
was suggestive of the Constitution recognizing taxes as
restrictions under Article 301 of the Constitution of India,
and that the power to levy taxes would be covered under
Article 304(b) of the Constitution of India.
The SC also rejected the argument of the Petitioners
related to high rate of tax and held that the taxes, whether
high or low, did not constitute restrictions on the freedom
of trade and commerce. At the best, such excessive tax
burden could be challenged under Part III of the
Constitution of India, but would not by itself justify the levy
being struck down as a restriction contrary to Article 301
of the Constitution of India. The SC held that levy of taxes
is not only an attribute of sovereignty but was also an
unavoidable necessity for the States. No responsible
government could do without levying and collecting taxes.
The SC further held that what Article 304(a) of the
Constitution of India dealt with was the discriminatory
taxation, which fell unequally between goods produced or
manufactured within the State and those which were
imported from outside. The essence of the guarantee in
Article 304(a) lies in the same or similar goods being
treated similarly in the matter of taxation. The SC, in this
regard, held that a levy on goods that were not produced
or manufactured in the State, was likely to make such
goods costlier but that is not enough for the levy to be
considered unconstitutional. A responsive Government
aware of the needs of its constituents would be under
tremendous pressure to keep such taxes low enough for
its constituents to be able to afford the same. Therefore,
Article 304(a) of the Constitution of India will not frown at
a levy simply because same or similar goods as taxed
were not produced or manufactured in the State. The SC
therefore, held that a non-discriminatory tax would not per
se constitute a restriction on the right to free trade,
commerce and intercourse guaranteed under Article 301
of the Constitution of India.
2. Question No. 2 & 3
The SC observed that since the answer to the first query is
negative, these queries were not required to be answered.
3. Question No. 4
The SC held that the use of the word “discrimination” in
Article 304(a) involved an element of “intentional and
unfavorable bias”. Mere grant of exemption or incentives
aimed at supporting local industries in their growth,
development and progress would not constitute
discrimination. It was held by the SC that unless such bias
is evident from the measure adopted by the State, a levy
would not be considered as discriminatory. The SC held
that such levy must have the intention of unfavourable
bias, and the benefit must be held to flow from a
legitimate desire to promote industries within its territory.
The SC therefore, held that so long as the intention
behind the grant of exemption/ adjustment / credit was to
equalize the tax burden on goods within the State and the
goods imported from other States, such fiscal legislations
would not violate Article 304(a) of the Constitution.
However, the SC left the issue open for examination by
the regular Benches hearing the matters.
SIGNIFICANT TAKEAWAYS
The nine Judge Bench of the SC overruled the
Compensatory Tax Theory propounded in the Automobile
Transport (supra) case. However, the SC had held that the
States must ensure that the levy equalizes the balance
between the tax burden on goods within the State and the
goods imported from other States. Therefore, SC has left it
for the HCs to examine the levy in their respective states,
when challenged.
In pursuance to aforesaid judgment, Patna HC60 and
Allahabad HC61, have already quashed the levy of entry tax
on goods purchased through e-commerce transactions in
the State of Bihar and Uttar Pradesh, finding it be
discriminatory. Whereas, Gujarat HC62 upheld the validity of
the levy on entry of goods wherein the provisions of the
Gujarat Entry Tax Act, 2001 provided for reduction of taxes
paid. The decisions will, definitely, provide a relief to the e-
commerce operators who were usually subjected to the
discrimination by the State and were imposed an extra tax
burden, as well as the end consumers who did not have to
bear the burden of tax on the goods brought from such
online portal.
However, with the coming of the GST in force, entry tax will
be subsumed and it is hoped that such issues pertaining to
discrimination and additional tax burden would get resolved
in future.
BACK
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60. Instakart Services Pvt. Ltd. v. State of Bihar, 2016-VIL-537-PAT (Patna HC).
61. Instakart Services Pvt. Ltd. v. State of U.P., 2016-VIL-702-ALH (Allahabad HC).
62. M/s Flipkart Internet v. State of Gujarat & Others 2016-VIL-685-Guj (Gujarat HC).
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MOVEMENT OF GOODS
FROM ONE STATE TO
ANOTHER IN
PURSUANCE TO A
PURCHASE ORDER
RECEIVED THROUGH
ONLINE PORTAL WOULD
AMOUNT TO AN INTER-
STATE SALE
In M/s WS Retail Services Private Limited63, the Madras HC held that
movement of goods from Karnataka to Puducherry for sale via online portal,
which landed in the delivery hub of the seller in Puducherry for sorting prior to
effecting delivery to the customer, would be an inter-state sale, and hence, the
seller had rightly paid tax under the CST Act.
FACTS
M/s WS Retail Services Private Limited (“Petitioner”) was engaged in the
business of online sales to customer. The goods meant for sale were stored by
the Petitioner in warehouses located in Mumbai, Kolkata, Bangalore, Delhi
and Noida. In the instant case, the Petitioner had sold goods to customers
located in Puducherry. For such sales, the Petitioner transported the goods,
corresponding to the purchase orders from one of its five warehouses to
Puducherry by way of an inter-state sale to the customers, on payment of CST
at the applicable rate. The goods were initially delivered to the delivery hub in
Puducherry i.e. M/s E-Kart Logistics, a division of the Petitioner. At the delivery
hub, the Petitioner sorted out the goods for delivery based on the address of
the customers.
The Petitioner was served a notice demanding tax on the sale of goods to
customers on ‘cash on delivery’ located in Puducherry in terms of the
Puducherry Value Added Tax Act, 2007 (“PVAT Act”). The Petitioner rejected
the claims of the department and submitted that the transaction in the instant
case was an inter-state sale. The delivery hub in Puducherry merely acted as a
sorting facility to sort the deliveries based on the address of the customer.
Thus, there was no sale or inventory holding transactions that were effected
from such hubs located in the Union Territory of Puducherry.
However, the department passed an order treating the transactions as a local
sale within the Union Territory of Puducherry and demanded tax along with
penalty.
ISSUE
Whether the sale of goods, in the aforementioned scenario, by the Petitioner
through online portal to customer located in Puducherry would be an ‘inter-
state sale’ or a ‘local sale within the Union Territory of Puducherry.
ARGUMENTS/ANALYSIS
The department submitted that there was no actual direct communication
between the actual buyer and actual seller. In the absence of any direct
communication, proper offer and the communication of acceptance between
the actual buyer and the actual seller, the movement of goods from the
originating State to Puducherry could not be treated as an inter-state sale
within the meaning of section 3(a) of the CST Act.
The department also submitted that in the case of ‘cash
on delivery’, the contract of sale comes into existence
only at that place where the ultimate customer decided to
take the final delivery of the product and pay for the sale.
The department argued that as these events took place
in Puducherry in the instant case, Puducherry would be
considered to be the place of contract. Therefore, in
terms of section 14 read with section 22 of the PVAT Act,
BACK
“No VAT will be levied on the
movement of goods from one
State to other on account of
purchase order received through
online portal.”
63. M/s WS Retail Services Private limited v. Union of India, 2016-VIL-661-MAD (Madras HC).
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the transactions were to be taxed within the Union Territory of
Puducherry.
The Petitioner, in response to the aforesaid contentions of the
department, submitted that for an inter-state sale, three
conditions have to be satisfied, namely, (i) there must be a
sale of goods; (ii) goods covered by the sale must actually
moved from one State to another; and (iii) the sale and the
movement must be part of the same transaction. The
Petitioner contended that the sales made by them satisfied all
the three conditions. The Petitioner further argued that the
presence of the delivery hub would not alter the nature of the
sale, and the same would remain an inter-state sale liable to
CST.
The Petitioner further submitted that the distribution hub in
Puducherry is used only for the purpose of segregation of
goods and logistic reasons, and therefore the situs of the sale
would not be Puducherry, but when the appropriation took
place as and when the purchase invoice was drawn in the
name of the purchaser. The Petitioner submitted that the
purchase invoice was generated in the name of the purchaser
in the State from which the movement of goods commenced
and applicable CST liabilities was also discharged. Therefore,
the distribution of the goods done from the distribution hub
would not amount to sale.
The Petitioner also argued that merely because the purchaser
could reject the goods, did not mean that the movement of
goods to Puducherry would not amount to an inter-state sale.
The Petitioner submitted that the goods were moved from the
warehouse to Puducherry only on the basis of the orders
placed by the buyers. Further, the website contained all
relevant details of the purchasers of the goods, including their
invoice number, the delivery bill number and the shipping
details. The purchasers were also aware that the shipping of
the product was being handled by E-kart Logistics and about
the expected date of delivery. The purchase order also
contained all the details which would prove that the
movement of goods from the warehouse to Puducherry had
occasioned purchase order.
DECISION
The HC referred to various judicial precedents. The HC
observed that the department had admitted the facts
reiterated by the Petitioner inter alia that the movement has
occasioned from outside the State. The department also did
not dispute the fact that a bill was generated in the name of
the purchaser for the product identified by him, and the
products were consigned from the Petitioner’s warehouse at
Karnataka to the Petitioner’s depot at Puducherry.
The HC held that the presence of the depot at Puducherry
would not make a difference to the nature of transaction
carried out by the Petitioner. The HC further held that merely
because way bills were drawn in the name of ‘self’ would not
by itself be a reason to disbelieve the nature of transaction
and to treat it as a sale within the Union Territory of
Puducherry. The goods could be sent to the consignee on a
‘self’ basis and delivered to the purchaser only after payment
of the purchase price so as to avoid future disputes related to
quality or quantity.
The HC also gave weight to the purchase order which
contained all the details to prove that the purchase order had
occasioned the movement of goods from Karnataka to
Puducherry. Therefore, in the light of the aforementioned, the
HC held that the transactions in the instant case were “inter-
state sale”.
SIGNIFICANT TAKEAWAYS
In the aforesaid case, the Madras HC clarified that the inter-
state movement of goods on a basis of a purchase order for
sale to customers through online portal, would be an inter-
state sale, irrespective of the fact whether such goods were
issued to the consignee in the name of ‘self’, or goods were
initially received by the delivery hub maintained by the
seller, or the buyer had a right to reject the goods.
Thus, the HC established the much disputed issue as to
which state would levy tax in such circumstances. This
would benefit all the retailers listed on online portals, who,
at many instances, were demanded tax under both the CST
Act as well as State VAT legislations. The clarity on this was
much awaited, and would relieve the retailers from financial
burden and unnecessary mental harassment.
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SHARING OF EXPENSES
FOR A COMMON
SERVICE WILL NOT BE A
CONSIDERATION FOR A
SERVICE BY ONE TO
ANOTHER
In M/s Gujarat State Fertilizers and Chemicals Ltd64, the SC held that sharing
of expenses for a common storage service, in accordance to an agreement
between the parties, would not amount to provision of service by one person
to the other.
FACTS
M/s Gujarat Alkalis & Chemical Ltd. (“GACL”) and M/s Gujarat State Fertilizers
and Chemicals Ltd (“GSFC”) (“Appellants”) are two public sector undertakings
of the State of Gujarat. The Appellants were receiving Hydro Cynic Acid (“HCN”)
from M/s. Reliance Industries Limited (“RIL”) through a common pipeline,
which was shared between them in the ratio of 60:40 respectively for
undertaking manufacturing activities. Since, the incineration process was also
required to be undertaken by the Appellants, the charges were initially paid by
GSFC, and later, collected from GACL. In this regard, the Appellants were
served with a SCN stating that incineration charges collected by the GSFC from
GACL amounted to providing “storage and warehousing services” under clause
(zza) of sub-section (105) of section 65 of the FA, and therefore, liable to tax.
The Appellant responded to the said notice stating that an agreement was
arrived at between Appellants regarding sharing of the common storage
facility. As per the agreement, the quantity of HCN as soon as it was received,
were to be consumed by GSFC and GACL at 60:40 ratio. Thus, the sole
monetary transaction between them, vide the agreement was for sharing the
expenses for usage of storage tank, for repair and maintenance of plant and
shares for spare consumed in plant etc. Therefore, it was argued by the
Appellants that there was no question of providing any services by one party to
the other. However, the adjudicating authority rejected that contention of the
Appellants and raised a demand of service tax along with interest and
penalties under the FA.
ISSUE
Whether sharing of a common storage facility between two parties would
amount to providing a service of storage and warehousing by one party to
another under section 65(105) (zza) of the FA?
ARGUMENTS/ANALYSIS
The Appellants, after referring to the relevant clauses of the agreement,
contended that GSFC did not ‘store’ HCN for GACL. Both GSFC and GACL
performed and were responsible equally for the job of storing and consuming
of HCN for their respective processes and for that purpose they both used to
bear the total expenses in the predetermined proportion. In this process,
nobody paid the other person any fee or charges for any kind of service.
Therefore, the process could not be treated as covered by clause (zza) of sub-
section 105 of section 65 of the FA.
The Appellant further argued that in order to attract the
levy of service tax on “Storage and Warehousing” of
goods, two conditions viz. (i) goods in question have to
come within four corners of the definition of “Storage and
Warehousing”, and (ii) there has to be an element of
service provided by one person to the other for which
charges are collected. Since, none of these conditions
were satisfied in the case of the Appellants, the
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“Payment of expenses on
account of sharing common
facilities cannot be treated as
consideration for a ‘service’.”
64. M/s Gujarat State Fertilizers and Chemicals Ltd & Anr. v. Commissioner of Central Excise, 2016-TIOL-198-SC-ST (SC).
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Appellants argued that the question of payment of any service
tax would not arise.
The Appellants further argued that the holding tank, which
was described as ‘storage tank’ by the department, was there
only to sustain the continuous process of both the plants and
to facilitate smooth operation of suction pumps and to avoid
any damage thereto. The Appellant never stored anything in
those tanks, and therefore, this process would not qualify the
term ‘storage’.
The Appellant also referred to the definition of ‘storage’ and
contended that the expression ‘store’ contained an element of
continuity of creating a stock and using that stock on a future
date. However, no such thing was present in the case of the
Appellant.
The department, on the other hand, submitted that since
GSFC was collecting ‘incineration charges’ from GACL, it was
rightly held that the service was provided by GSFC to GACL.
DECISION
It was observed by the SC that handling portion and
maintenance including incineration facilities was only in the
nature of joint venture between the Appellants, and the
Appellants have simply agreed to share the expenditure. The
payment which is made by GACL to GSFC is the share of GACL
which is payable to GSFC for using the common facilities. By
no stretch of imagination, could it be treated as ‘service’
provided by GSFC to GACL for which it was charging GACL.
Therefore, the SC held that no service tax would be leviable.
SIGNIFICANT TAKEAWAYS
Even though the decision of the SC in the aforesaid case
pertains to the positive regime of service tax, the SC’s
observation on the element of service provision basis the
terms of agreement stipulating the cost sharing
arrangement, would be relevant to determine the taxability
of such transaction. The SC held that merely because a sum
is being collected by one person would not be a sufficient
reason to hold that such an amount would be a
consideration for services.
The ruling also emphasizes the importance of the
commercial understanding between the parties in any
transaction to be evident in the agreement. Such clarity in
agreement always substantiates the facts and enables
application of the provisions of taxing statute with least
ambiguity.
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THE POWER OF STATE
TO LEGISLATE IS NOT
CURTAILED BY A
CENTRAL ACT WHICH
PROVIDED FOR
SHARING OF REVENUE
In M/s Ghodawat Energy Pvt. Ltd.65, the Bombay HC held upheld that the
validity of the Notification stating that the State was well within the legislative
competence to impose a tax on sale of goods.
FACTS
M/s Ghodawat Energy Pvt. Ltd. (“Petitioner”) was engaged in the business of
manufacturing pan masala. During the FY 2005-2006, the Petitioner
manufactured and sold pan masala without tobacco. The Petitioner also
manufactured and sold pan masala containing tobacco, commonly known as
“Guthka” / “Mawa”. The said pan masala containing tobacco was covered
under column (2) of the First Schedule to the Additional Duties of Excise
(Goods of Special Importance) Act, 1957 ( “ADE Act, 1957”). During the period
April 01, 2005 to February 28, 2006, the Petitioner discharged Additional
Duties of Excise (“ADE”) at 18% on the sale of such pan masala containing
tobacco. Consequently, the Petitioners claimed exemption from payment of
VAT on sale of such pan masala containing tobacco under Schedule Entry A45
of the Maharashtra Value Added Tax Act, 2002 (“MVAT Act”). However, the
exemption claimed by the Petitioner was disallowed by the department in light
of the Explanation to Schedule Entry A45 of the MVAT Act which clarified that
the word tobacco used in the said Schedule shall not include pan masala.
ISSUE
Whether Explanation to Schedule Entry A45 of the MVAT Act, 2002 inserted
vide Clause (10) of Notification No. VAT/1505/CR382/Taxation1 dated
January 21, 2006 (“Notification”) was discriminatory and hence ultra vires
Article 14 of the Constitution of India?
ARGUMENTS/ANALYSIS
The department argued that the pan masala containing tobacco was separate
and distinct from tobacco. The department contended that tobacco products
enumerated in section 14 of the CST Act did not contain pan masala as goods
of special importance shows that pan masala was a separate product.
Additionally, it was contended by the department that new first Schedule
substituted vide the Finance Act, 2005 did not specifically refer to pan masala
containing tobacco anywhere in column (3), and hence, from 2005, pan
masala containing tobacco, not being in column (3) of the first Schedule of the
ADE Act, 1957 will no longer fall within Entry A45 in the MVAT Act as well.
The department further argued that the Explanation to Schedule Entry A45
inserted vide aforesaid Notification was merely clarificatory in nature, and
therefore, the Explanation would apply retrospectively from year 2005.
The Petitioner, on the other hand, contended that the States were entitled to
levy sales tax on sale of all goods under Entry No.54 of
List II to the Schedule VII of the Constitution of India. The
Petitioner further contended that the State Governments
had entered into an arrangement with the Union
Government in respect of the levy of sales tax on three
commodities, namely, sugar, tobacco and fabrics. As per
the arrangement, the Union would levy additional excise
duties on these commodities. The entire additional excise
duties levied and collected by the Centre will be
disbursed to the States, and the States were to refrain
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“The State is empowered to levy
tax even if the same goods are
covered under the Central Act
and the Centre were to share the
revenue with the State.”
65. M/S Ghodawat Energy Pvt. Ltd. v. The State of Maharashtra, 2016-VIL-558-BOM (Bombay HC).
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from levying sales tax on these three commodities. In this
regard, the Petitioner relied on various Finance Commission
reports.
The Petitioner further submitted that Chapter 24 of the first
Schedule to the CETA covered tobacco and tobacco
manufactured substitutes. Further, since the said tariff item
was described in column (2) of the first Schedule to the ADE
Act, the additional duty of excise covered pan masala
containing tobacco also.
The Petitioner submitted that vide Notification that, only pan
masala containing tobacco was excluded from the ambit of
Entry A45 of the MVAT Act, though it continued to fall in the
first Schedule of the ADE Act, 1957; whereas other products
falling under the Schedule continued to be exempted under
Entry A45 to the Schedule. Further, the Petitioner submitted
that classification introduced by Notification, had no nexus
with the objects sought to be achieved by the legislation in the
form of Entry A45 of the MVAT Act. The pan masala containing
tobacco was singled out for this treatment. The Petitioner
therefore, contended that this was contrary to the
fundamental objective of Entry A45 read with the ADE Act,
1957 and hence, violative of Article 14 of the Constitution of
India, and liable to be struck down.
It was also submitted by the Petitioner that impugned
Notification levied VAT on pan masala containing tobacco
despite the State having received/ accepted the share as per
the Distribution of Revenue Order No.5 and, therefore, was
ultra vires the said Order and the Constitution. In this regard,
the Petitioner relied on Godfrey Phillips66 to support his
contention that States cannot levy sales tax on goods covered
by the ADE Act, 1957.
In response to the above, the department argued that the
decision on Godfrey Phillips (supra) was misplaced as it was
concerned with the ambit of Entry 62 of List II to the
Constitution of India and not with the legislative competence
of the State to impose a tax on sale of goods on account of
the enactment of the ADE Act, 1957.
The department further contended that the ADE Act, 1957
neither declared any goods to be of special importance nor did
it impose any restrictions/ conditions on the State as provided
under Article 286 of the Constitution of India. The department
argued that pan masala containing tobacco was never
covered within the First Schedule to the ADE Act, not even at
the time when section 7 of the ADE Act, 1957 was in force.
Hence, it (pan masala containing tobacco) would have fallen
within Entry A45 of the MVAT Act.
The department argued that pan masala was subjected to
ADE from April 01, 2005, when pan masala containing
tobacco ceased to be described in column (3) of the first
Schedule of the ADE Act, 1957. The impugned Notification
was merely issued to clarify this position. Therefore, the
Explanation would apply retrospectively from April 01, 2005.
DECISION
The Bombay HC rejected the contentions of the Petitioner. It
was held by the HC that the mere fact that the tobacco was
described and referred to in the Schedule to the ADE Act,
1957 and the pan masala containing tobacco was a distinct
commodity known to the commercial world, was not good
enough to prove that the levy was unconstitutional.
The HC observed that State’s power to legislate was not
curtailed by the ADE Act, 1957. If that was not curtailed, then,
any reliance on the constitutional scheme of distribution of
revenues and taxes could not be of assistance. That would
probably deprive a State of its share in the revenue even if a
tax is levied and collected in that State, but would not denude
it of its power which is otherwise traceable to the
constitutional provisions referred above. The HC, therefore,
upheld the aforesaid Notification and accordingly, disposed off
the writ petition.
SIGNIFICANT TAKEAWAYS
The HC in this case has held that the State has been
empowered to collect tax under the Constitution of India,
and has the power to elect whether they would want to levy
tax or would like receive revenue from the Centre.
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66. Godfrey Phillips (India) Limited & Anr. v. State of Uttar Pradesh & Ors. 2005-VIL-09-SC (SC).
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RETROSPECTIVE
APPLICABILITY OF THE
AMENDMENT
REQUIRING THE
PAYMENT OF SERVICE
TAX IMMEDIATELY ON
ENTRY OF THE
TRANSACTION
BETWEEN ASSOCIATED
ENTERPRISES IN THE
BOOKS OF ACCOUNT
DEFEATS THE
DOCTRINE OF
FAIRNESS
In McDonald’s India Pvt. Ltd.67, the CESTAT held that Explanation to Rule 6 of
the ST Rules, inserted in terms of the Notification, placing retrictions (i.e. in
case of transaction between associated enterprises, service tax had to be paid
immediately on entry of the transaction in the books of accounts) was
prejudicial to the interests of associated enterprises, and thereby, would have
prospective applicability.
FACTS
McDonald’s India Pvt. Ltd. (“Appellant”) is a wholly owned subsidiary of
McDonald’s Corporation, USA (“Holding Company”). The Appellant and the
Holding Company are associated enterprises, and the Appellant provided
management consultancy services to the Holding Company, for undertaking
franchise business in India. The Appellant is registered with the service tax
department, in relation to the provision of the aforementioned services. In
relation to the supply of the said service the Appellant received a service fee
and discharged appropriate service tax liability on such receipts from the
Holding Company.
During the period 2006-07 to 2007-08, the Appellant booked the amounts
receivable in this respect from the Holding Company in its Books of account,
but did not discharge any service tax thereon, as the said payment was not
received by it during such period.
The department, based on the entry made by the Appellant in the books of
accounts, in terms of the Explanation to Rule 6 of the ST Rules inserted vide
the Notification no. 19/2008 dated May 10, 2008 (“Notification”), issued a
SCN demanding service tax on the said amount. In terms of the said
Explanation to Rule 6 of the ST Rules, in case of transaction between
associated enterprises, service tax had to be paid immediately on entry of the
transaction in the books of accounts, irrespective of whether such amount has
actually been received.
The SCN was adjudicated and decided against the Appellant. On appeal, the
appellate authority upheld the demand under the adjudication order.
Subsequently, the Appellant filed an appeal against the said order before the
CESTAT.
ISSUE
Whether the Explanation to Rule 6 of the ST Rules, which required the
Appellant to discharge service tax on the consideration (receivable in relation
to a transaction with an associated enterprise) at the time of its credit in the
books of accounts of the Appellant, should have retrospective effect?
ARGUMENTS/ANALYSIS
The Appellant contended that on the receipt of the
service fee from the Holding Company, the Appellant paid
service tax within the stipulated time prescribed in Rule
6. Further, it was contended that the Explanation to Rule
6 of the ST Rules was inserted by the Notification, and
would not have any retrospective application for the
payment of service tax on the services provided to the
associated enterprise, when the payment for such service
was not received by the service provider. In this regard,
the Appellant relied on the judgments in the cases of
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“Service tax liability on
transactions between associated
enterprises undertaken during a
period prior to May 10, 2008,
shall arise on the realization of
the service fee thereof, even if
such amount has been reflected
in the books of accounts of the
service provider as an amount
outstanding during such prior
period.”
67. McDonald’s India Pvt Ltd v. Commissioner of Service Tax, Delhi 2016-VIL-962-CESTAT-DEL-ST (CESTAT Delhi).
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Martin Lottery Agencies Ltd.68 and Gecas Services India Pvt.
Ltd.69.
The department on the other hand reiterated its findings
recorded in the appellate order.
DECISION
The CESTAT examined the provisions of Rule 6 of the ST Rules
as they stood prior to and post the insertion of the concerned
explanation in terms of the Notification and observed that
subsequent to the amendment of Rule 6 by the Notification,
service tax would be required to be paid by the person liable to
pay service tax on services provided to associated enterprises,
even where the consideration for the taxable services
provided, is not actually received. In such cases service tax
was required to be paid immediately upon crediting/ debiting
of the amount in the books of account or the receipt of the
payment, whichever occurs earlier.
Further, it held that the Appellant has acted in conformity with
the provisions of Rule 6 of the ST Rules as it stood prior to the
amendment and during the period 2006-07 to 2007-08, in so
far as in terms of such provisions, the liability to pay service
tax arose upon the receipt of payment towards taxable
services which was admittedly not received by the Appellant
during the said period. No scope or occasion to discharge
service tax liability existed at the relevant disputed period. The
confirmation of service tax liability by way of retrospective
application of the amended provisions of Rule 6 of the ST
Rules defeats the legislative intent and also against the
principles of legal jurisprudence.
Subsequently, it was observed the principle of fairness,
legislations which modify accrued rights or which impose
obligations or new duties or attach a new disability, have to be
treated as prospective, unless the legislative intent is clear to
give the enactment a retrospective effect. The service tax
statute holding the field at the relevant point of time does not
contain any provision for demand of service tax by the
authorities, prior to realization of the value of taxable services.
The legislative intention behind the amendment, as explained
by the CBEC vide letter dated February 29, 2008, was to plug
the avoidance of tax on the ground of non-realization of
money from associated enterprises.
Since, by incorporating the Explanation in Rule 6 of the ST
Rules the restriction was imposed for the first time that in
case of transaction between associated enterprises, service
tax had to be paid immediately on entry of the transaction in
the books of account, the said amendment will be considered
as prospective in effect, otherwise the doctrine of ‘fairness’
would be defeated. Further, Notification No. 19/2008
introducing Explanation to Rule 6 of the ST Rules did not
specify that the same will have retrospective application to
deal with the past transactions. Thus, such explanation
placing restrictions mandating the payment of service tax on a
transaction between associated enterprises, immediately on
entry of such transaction in the books of accounts, is
prejudicial to the interest of the associated enterprises would
not apply retrospectively.
While observing the aforementioned, the CESTAT took note of
the judgments relied upon by the Appellant in this respect and
observed that such decisions squarely applied to the facts of
the case of the Appellant, and therein it has been held that
the inclusion of the Explanation clause vide the Notification in
Rule 6 of the ST Rules would apply prospectively for the
payment of service tax on the basis of entries made in the
books of accounts.
SIGNIFICANT TAKEAWAYS
The CESTAT in the said case made a clear distinction in the
nature of amendments which can have prospective
application only. In this regard, it is to be noted that any
amendments bringing about a change in law resulting in the
modification of certain accrued rights or imposition of any
new liability or obligation or duties or disability or being
restrictive in a manner prejudicial to the interest of the
Appellant, shall in most circumstances have a prospective
applicability, unless the retrospective applicability thereof
has been made specific.
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68. Union of India v. Martin Lottery Agencies Ltd. (2009) 14 STR 593 (SC).
69. Gecas Services India Pvt. Ltd. v. CST (2014) 36 STR 556 (CESTAT Delhi).
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CLIENT’S LOGO
DISPLAYED IN THE
PRODUCT
ADVERTISEMENTS OF
THE SERVICE PROVIDER
IS NOT IN THE NATURE
OF PROMOTING THE
CLIENT’S PRODUCT
AND IS NON-TAXABLE
AS A BUSINESS
AUXILIARY SERVICE
In M/s Datamini Technologies India Ltd. and M/s Zenith Computers Ltd.70, the
CESTAT held that mere inclusion of the logo of a third party in the
advertisements undertaken by a manufacturer in relation to the promotion of
the sale of it products, was not in the nature of Business Auxiliary Service
being provided by such manufacturer to such third party.
FACTS
M/s Datamini Technologies India Ltd. And M/s Zenith Computers Ltd.
(collectively referred to as “Petitioners”) were engaged in the manufacture and
sale of computers. In this regard, the Petitioners undertook the advertisement
of their products. Such advertisements carry a foot note “Intel Inside” and
“Microsoft Windows”, i.e. logos belonging to the respective owners i.e. Intel
and Microsoft. The Petitioners received the reimbursement of expenses
incurred by them in relation to such advertisements from Intel and Microsoft.
Pursuant to the same, intelligence was gathered by DGCEI that the Petitioners
are engaged in brand promotion of Intel and Microsoft (“Brand Owners”) for
which commercial consideration was being periodically paid to them by the
Brand Owners. It appeared to the DGCEI that the services provided by the
Petitioners were taxable under Business Auxiliary Service under section 65
(19) of the FA (“Business Auxiliary Service”), effective from July 01, 2003. The
DGCEI found that the Petitioners were not discharging their service tax liability
on the commercial considerations received by them from the Brand Owners.
Accordingly, SCNs, demanding service tax on the said amounts of
consideration, were issued to the Petitioners (i.e. to Zenith for the period July
01, 2003 to February 28, 2007 and to Datamini for the period July 01, 2003
to August 31, 2006). The SCNs were adjudicated and the demands of service
tax therein were confirmed against the Petitioners under the category of
Business Auxiliary Service. Aggrieved by the same, the Petitioners filed an
appeal before the CESTAT.
ISSUE
Whether service tax was payable under Business Auxiliary Service on the
advertisements of computers (i.e. the products of the Petitioners), carrying a
foot note “Intel Inside” and “Microsoft Windows” logos, belonging to their
respective Brand Owners, where reimbursement of the said advertisement
expenses was received from Intel and Microsoft?
ARGUMENTS/ANALYSIS
The Petitioners submitted the following:
(i) The advertisements were only for promoting the Petitioners’ own product
i.e. computers and the insertion of reputed brands i.e. “Intel” and
“Microsoft”, as a footnote in the said advertisements was only for boosting
the image of the Petitioners’ products in the market. The main purpose
was to advertise computers and inserting of brands of
Brand Owners was just incidental, to the said main
purpose, and, such incidental activity is not subject to
levy of service tax.
(ii) The entire premise of the SCNs was erroneous in so
far as the promotion or marketing of logo or brand was
not covered under Business Auxiliary Service (i.e.
promotion or marketing or sale of goods produced or
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“Brand promotion activity
undertaken for a client does not
amount to Business Auxiliary
Service”
70. M/s Datamini Technologies (India) Ltd. and M/s Zenith Computers Ltd. v. Commissioner of Central Excise, Thane I TS-550-CESTAT-2016-ST (CESTAT
Mumbai).
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provided by or belonging to the client) under section 65
(19) read with section 65(105)(zzzzq) of the FA, and the
said activity had become taxable under “Brand Promotion
Service” w.e.f. July 01, 2010 under section 65(105)
(zzzzq) of the FA. In this regard, the Petitioners relied on
the judgment of the CESTAT in the Jetlite (India) Ltd.
case.71
(iii) When a new entry is introduced covering a particular
activity without amending the earlier entry, it cannot be
said that the earlier entry covered the subsequently
introduced entry. In this regard, the Petitioner relied on
the judgments inter alia in the cases of Indian National
Shipowners’ Association72 and IBM India73.
(iv) In terms of section 65A(2)(a) of the FA, for the purpose of
classification of services, the sub-clause providing most
specific description is to be preferred to sub-clauses
providing general description. The head of “advertisement
agency service” under section 65(105)(e) of the FA gives
more specific description, than Business Auxiliary Service
under section 65(105)(zzb) of the FA, and hence, the said
activity of the advertisement of brands of Brand Owners
was correctly classifiable under “advertisement agency
service”.
(v) The advertisement agency was already discharging
service tax on the said amounts, under the category of
“advertisement agency service”, and subjecting the said
amounts of reimbursement to service tax, again would
lead to the double taxation.
(vi) The levy of service tax on “Brand Promotion Service” has
been brought from July 01, 2010, and hence, for the
period prior thereto, service tax was not payable.
(vii) Since the recipients of service i.e. the Brand Owners did
not have any establishments or offices in India, the said
services would be treated as export, as the recipients are
located outside India and also the benefits were accrued
to the recipients located outside India. In this regard, the
Petitioners relied on the judgment in the case of ABS
India Ltd.74, Service Tax Circular No. 111/05/2009 – ST
dated February 24, 2009 and Circular No. 141/10/2011
– TRU dated May 13, 2011.
(viii) Since the benefits of the services accrued outside India,
the said service was in the nature of export of service. In
this regard, the Petitioners relied on the legal provisions in
relation to export of services prevalent during the period
February 28, 1999 to March 01, 2007.
(ix) The adjudicating authority had taken cognizance of
reimbursement of advertisement expenses received by
the Petitioners in convertible foreign exchange, but the
benefit of export of service had been denied by such
adjudicating authority solely on the ground that service
was neither delivered outside India nor used in business
outside India, but consumed or used for business in India.
(x) The adjudicating authority has accepted the fulfilment of
the condition under export of service that the order for
provision of such service was made by the recipient of
such service from any of his commercial or industrial
establishment or any office located outside India. Even if
value for services is received in Indian currency, benefit of
export of service is available to the Petitioners. In this
regard, the Petitioners relied on the judgments in the
cases of Nipuna Services75 and Shelpan Export76.
(xi) The amounts reimbursed from Brand Owners were at
actuals, and thereby made the Petitioners pure agents.
The department contended that:
(i) The ratio of the judgment in the case of Jetlite (India) Ltd.
(supra) would not apply to the present case of the
Petitioners, as the facts of the said case were not parallel
to the case of the Petitioners.
(ii) In relation to the allegations in SCNs, advertisements and
the agreements were to be read together and it was clear
that the Petitioners were promoting the sale of Intel chips
and Microsoft Windows software and hence, the said
service would be covered under Business Auxiliary
Service.
(iii) The activity for which consideration is received was for
market development activity as substantiated under the
agreement with the Brand Owners and hence, would be
covered under the Business Auxiliary Service.
(iv) The services provided were specifically covered under the
category of Business Auxiliary Services as defined under
section 65(19) of the FA and the said services cannot be
treated as an export of service. In this regard, the
department relied on the judgments in the case of
Microsoft Corpn. (I) (Pvt) Ltd.77
DECISION
The CESTAT examined the definition of Business Auxiliary
Service and observed that such service as defined under the
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71. Jet-lite India Limited v.CCE (2011) 21 STR 119 (CESTAT Delhi).
72. Indian National Shipowners’ Association v. Union of India (2009) 14 STR 289 (Bom) (Bombay HC) upheld by the SC in Union of India v. Indian National
Shipowners’ Association and Ors. (2011) 21 STR 3 (SC).
73. IBM India Pvt. Ltd. v. CCE (2010) 17 STR 317 (CESTAT Bangalore).
74. ABS India Ltd. v. CST (2009) 13 STR 65 (CESTAT Bangalore).
75. Nipuna Services Ltd. v. CCE, C&ST (2009) 14 STR 706 (CESTAT Hyderabad).
76. CCE v. Shelpan Exports 2010 (19) STR 337 (CESTAT Hyderabad).
77. Microsoft Corp. India Pvt. Ltd. v. CST 2009 (15) STR 680 (CESTAT Delhi).
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FA means promotion or marketing or sale of goods produced
or provided by or belonging to the client. Therefore, for
promoting or marketing or sale, there should be goods. In
terms of the SCNs the Petitioners are engaged in the activity
of promotion of the brands of the Brand Owners. There was no
allegation that the Petitioners were promoting or marketing or
selling the goods of the Brand Owner.
The CESTAT observed that the issue came up before this
Tribunal in the case of Jetlite (India) Ltd. (supra). In the said
case, as per the agreement between Sahara Corporation and
Jetlite (India) Ltd. for the promotion of the business of Sahara
Corporation in relation to its housing and real estate projects,
Jetlite (India) Ltd. printed the logo of Sahara Corporation on its
air tickets, boarding passes, baggage tags, publicity materials
and advertisements in newspaper holding etc., in lieu of
assured payment made by Sahara Corporation to it. It was
held that the publicity agreed upon and provided by Jetlite
(India) Ltd. to Sahara Airlines Ltd. resulted into brand building
of Sahara Corporation which promoted marketability of the
services provided by Sahara Corporation, by creating
awareness byway of building brand value of the group. It was
held in the order appealed against, that Jetlite (India) Ltd.
failed to produce any evidence to show as to how they had
bona fide belief that the services provided by them to promote
the business and area operation to Sahara Corporation was
not taxable under the category of Business Auxiliary Services.
In that case, it was contended on behalf of Jetlite (India) Ltd.
that the activity undertaken by them was at the most covered
under the entry of brand promotion for the purpose of levy of
service tax. Therefore, the issue was whether the service
rendered to Sahara Corporation would fall under the category
of Business Auxiliary Service within the meaning of the said
expression under the FA. In that case it was observed by the
CESTAT that if at all any activity of promotion and marketing
was rendered by the Jetlite (India) Ltd. to Sahara Corporation,
it was in respect of sale activities pertaining to immovable
properties of Sahara Corporation and that too by merely
displaying the logo of the Sahara Corporation. Therefore, the
same would not fall within the category of Business Auxiliary
Services under the FA. It was further observed that in order to
classify any activity to be the service in the nature of business
auxiliary service, the same should be relating to the promotion
or marketing of some activity of the service recipient which
should be in the nature of service provided to the clients.
Mere promotion of a brand by itself did not amount to
promotion or marketing of services till specific entry in that
regard was made in the FA and that was the understanding of
the law makers. To bring into the tax net even mere promotion
of a brand, the new entry was introduced in the FA. It is only
consequent to the said entry that mere display of brand could
amount to promotion of services rendered by the client and
not otherwise. Thereafter, it was held that the activity
undertaken by them was that of brand promotion and not
Business Auxiliary Service prior to July 01, 2010.
In the case of the Petitioners also putting of the logo of the
Brand Owners did not specify which products of the Brand
Owners were being promoted by the Petitioners. Intel is a
common brand for various products like ‘CPU chip’,
‘motherboard’ etc. and Microsoft is also a brand name
common to various software like Windows 95, Windows 98,
and Windows 2000, etc. Moreover, the advertisement in the
newspaper regarding the product was merely for promoting
the sale of computers manufactured by the appellants which
were having the features of Brand Owners’ products which did
not mean is the activity or promoting/marketing or sale of
goods manufactured by the Brand Owners. Further, the
CESTAT observed that in the advertisements placed before it
show the features of the computers to be sold by Petitioners
but did not show the features of the products of the Brand
Owners. If the activity of advertisement of the brand of the
Brand Owners is sought to be taxed during the relevant period,
it should be for the ‘Advertisement Service’, on which service
tax has already been discharged.
In light of the aforementioned, the CESTAT held that the Jetlite
(India) Ltd. case (supra) is squarely applicable to the case of
the Petitioners, and the activity of the Petitioners during the
relevant period under consideration, was not covered under
Business Auxiliary Service.
SIGNIFICANT TAKEAWAYS
The CESTAT in the said case has distinguished between the
natures of activities amounting to Business Auxiliary Service
from the activities which shall amount to “Brand Promotion
Service”. It has propagated its stand on the position of law
held in the Jetlite (India) Limited case (supra).
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CENVAT CREDIT
CANNOT NOT BE
AVAILED ON THE BASIS
OF A COMMON INVOICE
ISSUED IN RELATION TO
INPUT SERVICES USED
BY MULTIPLE
TAXPAYERS, WHERE
SUCH ASSESSEES
WERE INDIVIDUALLY
REGISTERED WITH THE
DEPARTMENT
In Kiran Devchand Shah and Ors.78, the CESTAT held that, where the co-
owners of a property were registered individually for the purpose of payment of
service tax, the invoices on the basis of which such co-owners sought to avail
CENVAT credit should be raised in their individual names.
FACTS
Kiran Devchand Shah and Ors. (“Appellants”) were 18 taxpayers, individually
registered with the service tax department under the category of “renting of
immovable property service” in relation to the premises Devchand House
(“Property”). The Property was owned by 23 owners, each having a specific
share in the ownership rights of the Property, and the said property had been
rented out by the co-owners jointly to different entities. The Appellants
received the rent from the said renting activity, in their individual names and
each individual was a separate entity registered with the department
separately paying service tax, and filing ST-3 returns separately.
The department, on the verification of the ST-3 returns filed by the Appellants,
noticed that the Appellants had availed the CENVAT credit on the basis of
invoices which were not in their individual names but were in the name of Shri
D.C. Shah and others. Thereafter individual SCNs were issued to all the
Appellants proposing to reject and to recover ineligible CENVAT credit with
interest and penalties. The Appellants, in their replies to the SCNs contended
that the CENVAT credit had been claimed in accordance with the provisions of
law. The SCNs were adjudicated and the demands made therein were
confirmed. The Appellants filed appeal against the adjudication order, wherein
the appellate authority upheld the demands as per the adjudication order for
all the appeals. Aggrieved by the said order, the Appellants filed an appeal
before the CESTAT.
ISSUE
Whether the Appellants have correctly availed the CENVAT credit on the basis
of invoices which were not in their individual names?
ARGUMENTS/ANALYSIS
The Appellants contended that the name “D.C. Shah and Others” was used
synonymously with that of the individual co-owners of the Property, and that
“Dev Chand House” was their family name which the Appellants have been
using for decades. They submitted that the Appellants have been availing
CENVAT credit in accordance with law, except for one aspect that the invoices
in support thereof, were in the name of “D.C. Shah and Others” (i.e. the family
name representing all the 23 co-owners) instead of their individual names.
Subsequently, it was submitted that the payment to all the service providers
was made from the joint account maintained in the name of 23 co-owners.
The Appellants also submitted that the invoices issued by the service provider
clearly show address, nature of services, name of service,
the service tax charged and details of registration of
service provider as required. That apart, they submitted
that there was no dispute as to the usage of the said
input service by the Appellants for providing the output
service viz., renting of immovable property service. The
dispute was only in respect of the names in the bills in
respect of such input services. The Appellants also
submitted that it is only a technical or procedural lapse
and CENVAT credit should not be denied on procedural
BACK
“CENVAT credit cannot be availed
by a taxpayer on the basis of an
invoice in the name of another,
even if evidence exists that the
said invoice is in relation to the
services used by the taxpayer for
providing his output service.”
78. Kiran Devchand Shah and Ors. v. CCE, Belgaun 2016-VIL-899-CESTAT-BLR-ST (CESTAT Bangalore).
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lapse. In support of their submission, the Appellants relied
upon judgments, inter alia in the cases of Pharmalab Process
Equipments Pvt. Ltd.79 and DNH Spinners80.
The department reiterated the findings in the appellate order,
and submitted that at the time of receipt of rent, the
Appellants individually received the rent from separate rented
persons who were occupying separate portions of the building.
The amount received as rent on which the Appellants had to
pay service tax was shown separately, and service tax was
paid only on the individual receipts of rent, after claiming
Small Scale Industries (“SSI”) exemption. The department also
submitted that, in order to claim SSI exemption and to pay
service tax on the balance amount, the Appellants were
showing their receipt of rent separately in their individual
names but only at the time of availing CENVAT credit they
received one wholesale bill and availed credit proportionate to
their share. It further submitted that the argument of
Appellants that this arrangement is for administrative
convenience only, cannot be accepted and the law is very
clear that no CENVAT credit can be availed by a taxpayer on
the invoices which is not in his name. In this regard, the
department relied on Rule 9 of the CCR.
DECISION
The CESTAT observed that since the Appellants were
registered separately and maintained their records
accordingly, a uniform approach in relation to the availment of
CENVAT credit, was required to be followed. For registration
each of the Appellants is separate entity but for availing
CENVAT credit they are a joint entity. Such change of principle
for separate purposes was not justified. The CESTAT held that
the judgments relied upon by the Appellants were irrelevant
on account of factual differences.
Accordingly, the CESTAT held that the Appellants were not
eligible to avail CENVAT credit on the basis of invoices issued
in the name of “D.C. Shah and Co.”
SIGNIFICANT TAKEAWAYS
In the said case, the CESTAT has proceeded contrary to the
generally accepted principle of law that substantial benefit
cannot be denied to a taxpayer on the basis of a procedural
lapse. The receipt of the invoices under a common name
(instead of being received individually), for administrative
convenience was a mere procedural lapse. In the said case
there was no dispute in relation to the proportion of CENVAT
credit availed, out of the total CENVAT credit, being availed
by the individual Appellants or in relation to the invoices
actually pertaining to and being utilised in relation to the
services provided by the Appellant. Given that, the CESTAT
has denied the benefit of CENVAT credit to the Appellants.
Accordingly, the aforesaid principle of law cannot be used in
a generality. Its applicability is subject to the facts of a
specific case. On a similar context, it is pertinent to note that
in the case of Anil Saini and Ors81, the CESTAT has allowed
the co-owners of a property (rented out jointly) to avail the
benefits of Notification No. 06/2005-ST dated March 01,
2003, providing for exemption to small service providers,
based on the individual incomes received by such co-
owners.
BACK
79. Process Equipments Pvt. Ltd. v. CCE, (2009) 16 STR 94 (CESTAT Ahmedabad).
80. CCE, Vapi v. DNH Spinners (2006) 16 STR 418 (CESTAT Ahmedabad).
81. Anil Saini and Ors v. CCE, Chandigarh – I 2016-VIL-963-CESTAT-CHD-ST (CESTAT Chandigarh).
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1. Revision of Income Computation and Disclosure Standard
The Central Government vide Notification No. 87/2016,
dated September 29, 2016, notified the revised Income
Computation and Disclosure Standard (“ICDS”) and
rescinded its earlier Notification82 dated March 31,
2015.83 The revised ICDS would be applicable to all the
taxpayers (other than an individual or a Hindu undivided
family who is not required to get his accounts of the
previous year audited in accordance with the provisions of
section 44AB of the IT Act), following the mercantile
system of accounting, for the purposes of computing the
income chargeable to tax under the head ‘Profits and
gains of business or profession’ or ‘Income from other
sources’. The revised ICDS would be applicable from the
FY 2016-17 (i.e. AY 2017-2018).
The revised ICDS provides for some of the following
important changes:
(i) Valuation of inventories
(a) In addition to the ‘retail method’ of measuring
‘cost of inventory’, the revised ICDS has
introduced ‘standard cost method’ as
measurement of cost. In case where ‘standard
cost method’ is applied, details of the inventories
and a confirmation that ‘standard cost’
approximates the actual cost would be required
to be disclosed.
(b) The previous ICDS provided for determining the
cost of services in the case of ‘service provider’.
The revised ICDS has removed the reference to
‘service provider’.
(ii) Revenue recognition
(a) The previous ICDS provided that revenue from
service transactions are to be recognised by the
percentage completion method (“PCM”) in all
cases. The revised ICDS has now carved out
certain exceptions to the PCM, like revenue from
service contract with less than 90 days may be
recognised when the contract is completed or
substantially completed.
(b) In case of recognition of interest on refund of any
tax, duty or cess, the revised ICDS provides that
such interest should be deemed to be the income
of the previous year in which such interest is
received and not on accrual basis.
(iii) Tangible fixed asset
(a) Revised ICDS has removed the requirement of
separately indicating the details of the joint
owned fixed assets in the tangible fixed asset
register.
(iv) The effects of change in foreign exchange rates
(a) Revised ICDS requires the non-monetary
inventories, which are carried at ‘net realisable
value’ and denominated in a foreign currency,
should be reported using the exchange rate that
existed when such value was determined.
(b) For the purpose of translating the financial
statements, the revised ICDS no longer requires
the foreign operations to be classified into
integral or non-integral operations.
(v) Securities
(a) The revised ICDS has divided the standard into
two parts.
Part A deals with securities held as ‘stock in
trade’. The revised ICDS also modified the
definition of ‘securities’ to include share of ‘a
company in which public are not
substantially interested’, but not include
certain derivatives. Further, the revised ICDS
also allows measuring the securities using
‘weighted average cost method’.
Part B deals with securities held by a
scheduled bank or public financial
institutions formed under a Central or a State
legislation or so declared under the CA, 1956
or the CA, 2013. These securities are to be
classified, recognised and measured in
accordance with the RBI guidelines.
(vi) Borrowing cost
(a) Revised ICDS has introduced the definition of
‘qualifying assets’ for the purpose of determining
the borrowing cost that can be capitalized. It
Non-Judicial Updates
BACK
Direct Tax
TAX SCOUT | Oct - Dec 2016
82. Notification No. 32/22015.
83. Rescinded vide Notification No. 86/2016, dated September 29, 2016.
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specifies that ‘qualifying asset’ should be such
an asset that necessarily requires a period of 12
months or more for its acquisition, construction
or production.
——————————————————————
2. Phasing out exemptions – rate of depreciation restricted
to 40%
The Finance Minister in his Budget speech of 2015 had
announced for reduction in corporate tax rate from 30%
to 25% over a span of four years with simultaneous
withdrawal of exemptions, incentives and deductions
available. On this line in the Budget speech of 2016, the
Finance Minister announced the measure to phase out
deduction by reducing the highest rate of depreciation to
40% with effect from April 01, 2017. Further, in line with
the declared policy of lowering of corporate tax rate, the
Finance Act, 2016 introduced section 115BA in the IT Act,
which provided that the domestic companies that are
incorporated after March 01, 2016 and are engaged in
the business of manufacturing or production of any article
or thing have the option to be taxed at a lower rate of
25%, as compared to 30% tax rate applicable on other
domestic companies.
In furtherance to its objective to restrict the highest rate
of depreciation to 40%, the Central Government, through
CBDT, has issued Notification No. 3399(E) dated
November 07, 2016 introducing proviso to Rule 5(1) of
the IT Rules84, which provides that the rate of
depreciation shall be restricted to 40% with effect from
April 01, 2016 on the WDV of such block of assets of
companies which have been exercising benefit of lower
corporate tax rate of 25% under section 115BA of the IT
Act.
Further, a plain reading of the notification suggests that
for rest of the taxpayers, the highest rate for depreciation
will be restricted to 40% with effect from April 01, 2017
for all the assets85 (irrespective as to whether they are
new or old falling in the relevant block of assets), on
which otherwise, presently higher rate of depreciation is
allowed.
——————————————————————
3. Central Government prescribes Form for application for
immunity from penalty and initiation of proceedings
The CBDT has issued Notification No. 3150(E) dated
October 5, 2016, introducing Rule 129 in the IT Rules,
prescribing the application (Form No. 67) to the AO under
section 270AA of the IT Act for grant of immunity from
imposition of penalty. The immunity from imposition of
penalty is in case of under reporting or misreporting of
income under section 270A of the IT Act or immunity from
initiation of proceedings in case of wilful attempt to evade
tax or failure to furnish returns of income under section
276C or section 276CC of the IT Act respectively.
A taxpayer can make an application under section 270AA
of the IT Act in Form No. 67, only if the tax and interest
payable as per the assessment order or reassessment
has been paid within the period specified in the notice
served and no appeal against the instant order has been
preferred. The application has to be made within one
month from the end of the month in which the order has
been passed. Once these conditions are fulfilled, the AO,
after the expiry of period of filing appeal on the instant
order, shall grant immunity available under the scope of
section 270AA of the IT Act. Further, the AO shall, within a
period of one month from the end of the month in which
the application is received, pass an order accepting or
rejecting such application. However, the application
cannot be rejected unless the taxpayer has been given an
opportunity of being heard. If the application is accepted
by the AO, thereafter no appeal or revision on the order
shall be admissible before the CIT(A) under section 246A
of the IT Act.
——————————————————————
4. Lumpsum lease premium or one-time upfront lease
charges are not rent within the meaning of section 194-I
of the IT Act
Section 194-I of the IT Act provides for deduction of tax at
source at prescribed rates on payment for rent. Various
representations were received by the CBDT in context of
the issue of whether the provisions of section 194-I of the
IT Act will be applicable to lumpsum lease premium or
one-time upfront lease charges.
While examining the issue, the CBDT took note of the
decisions in case Indian Newspaper Society86, Foxconn
India Developer Limited87 and Tril Infopark Limited88
BACK
TAX SCOUT | Oct - Dec 2016
84. Rule 5(1) of the IT Rules provides for allowance of deduction for depreciation on any block of assets under section 32(1)(ii) of the IT Act at the rates
prescribed in the Appendix I of the IT Rules.
85. Some of the assets on which depreciation is allowed at a higher rate are renewable energy devices (like, solar or windmill (80%), air / water pollution
control equipment (100%), gas cylinders (60%), electrical equipment (80%), computers including computer software (60%), etc. 86. The Indian Newspaper Society (ITA No. 918 & 920/2015) (Delhi HC).
87. Foxconn India Developer Limited (Tax Case Appeal No. 801/2013)(Madras HC).
88. Tril Inforpark Limited (Tax Case Appeal No. 882/2015) (Madras HC).
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wherein it was held that lumpsum lease premium/ one-
time non-refundable upfront charges would not fall within
the ambit of section 194-I of the IT Act. Further, it was
also noted that the IRA had not filed an SLP against the
said decisions.
In view of the above, the CBDT issued a circular89
clarifying that the above-mentioned payments, which are
not adjustable against the periodic rent are not in the
nature of rent within the meaning of section 194-I of the
IT Act.
The said clarification from the CBDT will lead to curbing of
unnecessary litigation on a settled issue and is in line with
the recent trend of the CBDT to provide required
clarifications on litigative issues.
——————————————————————
5. Rules and Forms for furnishing statement of income
distributed by a securitisation trust notified
Section 115TCA was introduced vide the Finance Act
2016, which deals with taxation on income from a
securitisation trust. As per section 115TCA(4) of the IT
Act, any person responsible making payment to the
investors on behalf of the securitisation trust shall
furnish, within the prescribed period, to investors and to
the prescribed income-tax authority, a statement in such
form and verified in such manner, giving details of the
nature of the income paid or credited during the previous
year and such other relevant details, as may be
prescribed.
In view of the provisions of 115TCA(4) of the IT Act, the
CBDT has issued a Notification90 introducing Rule 12CC in
the IT Rules, which also prescribes the forms in respect of
income distributed by securitisation trust under section
115TCA of the IT Act. This Rules will be deemed to have
come into force from June 01, 2016. The following are
the key points laid down by the said Rule:
(i) For furnishing of details to income-tax authority
(a) The prescribed income-tax authority is the
Principal Commissioner or the CIT within whose
jurisdiction the principal office of the
securitisation trust will be situated.
(b) The statement of income distributed by a
securitisation trust to its investors shall be
furnished to such authority by 30th of November
of the FY falling the previous year during which
such income is distributed.
(c) Such statement has to be finished electronically
(under a digital signature) in Form 64E, duly
verified by an accountant in manner indicated.
This Form provides for various details, like,
details of income distributed, details of trustees /
beneficiaries, status of the trust, details of the
investors, etc.
(ii) For furnishing of details to investors
(a) The statement of income distributed by a
securitisation trust to its investors shall be
furnished to such authority by 30th of June of the
FY falling the previous year during which such
income is distributed.
(b) Such statement has to be finished electronically
in Form 64F, duly verified by a person distributing
the income on behalf of the securitisation trust in
the manner indicated. This Form provides for
various details, like, name, address, PAN of the
investor and the trust, details income paid /
credited by the securitisation trust to the investor
during the previous year, etc.
The details provided in Form 64F would assist the
investors to appropriately disclose the incomes in their tax
returns and the same would also match with the records
of the IRA.
——————————————————————
6. Government revises India – Korea DTAA, with effect from
September 12, 2016
CBDT vide Notification No. 96/2016 notified the revised
India-Korea DTAA, signed on May 18, 2016 and entered
into force on September 12, 2016. Provisions of the new
DTAA will have effect in India in respect of income derived
in fiscal years beginning on or after April 01, 2017. The
revised India-Korea DTAA inter alia has following
significant features:
(i) Source based taxation of capital gains arising from
alienation of shares held by the alienator who holds
directly or indirectly at least 5% of share capital. This
revision is important as it revises the provision as
compared to the residence based taxation contained
in the erstwhile DTAA.
(ii) Reduces withholding tax rates from 15% to 10% on
royalties/fees for technical services/interest income.
BACK
89. Circular No. 35/ 2016 dated October 13, 2016.
90. Notification No. 107/2016/ F.No.370142/28/2016-TPL dated November 28, 2016.
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(iii) Provides for exclusive residence based taxation of
shipping income from international traffic under
Article 8 to facilitate movement of goods through
shipping between two countries. Profits from shipping
and air transport has been defined to include rental
of a ship or aircraft on bareboat charter basis, use,
maintenance or rental of containers used to transport
goods where such rental or use is incidental to the
operation of ships or aircraft, interest on investments
directly connected with operation of aircraft and ships
in international traffic, if integral to carrying on
business.
(iv) Introduces Article 9(2) to provide recourse to the
taxpayers of both countries to apply for in transfer
pricing disputes as well as apply for bilateral APAs. It
is further stated that MAP requests in transfer pricing
cases can be considered if the request is presented
by the tax payer to its competent authority after entry
into force of revised DTAA and within three years of
the date of receipt of notice of action giving rise to
taxation not in accordance with the DTAA.
(v) ‘Other income’ will not be taxable in the state of
residence of the recipient of such income if such
recipient has a PE in the other state, performs
independent personal services from a fixed base in
the other state and the right or property in respect of
such income paid is connected to such PE or fixed
base.
(vi) PE related revisions:
(a) The threshold period for building site/
construction/ installation/ supervisory PE has
been reduced to 183 days from nine months.
(b) Provides for a service PE clause wherein service
PE may be formed in a country, on furnishing of
services (including consultancy services) by an
enterprise through its employees or other
personnel for a period aggregating more than
183 days within any 12 month period.
(c) Provides for wider scope of agency PE, by
including maintenance of stock of goods from
which regular delivery takes place and providing
for habitual securing of orders by such
dependent agent, which will now constitute
agency PE.
(d) An insurance enterprise of a contracting state,
except in case of re-insurance, will be deemed to
have a PE in the other contracting state if it
collects premium in other state or insure risks
situated therein through a person other than a
dependent agent.
(e) The carrying on of business of an enterprise
through a broker, general commission agent or
any other agent of independent status would be
considered as PE, when the activities of such an
agent are wholly on behalf of an enterprise of the
other state, and conditions are imposed between
that enterprise and the agent in their commercial
and financial relations, which differ from those
which would have been made between
independent enterprises.
(vii) Reduces the tax rate by the source state on the gross
amount of interest from 15% to 10%.
(viii) Inserts new Article on LOB (i.e. anti-abuse provisions).
(ix) Updates Article on EOI to the latest international
standard to provide for exchange of information to
the widest possible extent (for instance, domestic tax
interest cannot be ground for denial of information,
facilitating exchange of information between banks,
information exchanged can be used for other law
enforcement purposes).
With the significant increase in the bilateral trade evident
in the recent years, these are very important
developments and puts Korea at par with other countries.
——————————————————————
7. Notification of protocol to India-Japan DTAA
On December 11, 2015, the Government of India and the
Government of Japan signed a protocol for amending the
existing India-Japan DTAA. CBDT vide Notification No.
102/2016 has notified this protocol, followed by a press
release stating that both the Governments have notified
the protocol. This protocol entered into force on October
29, 2016.
The protocol provides for internationally accepted
standards for effective exchange of information on tax
matters including bank information and information
without domestic tax interest. It provides that the
information received from Japan in respect of a resident
of India can be shared with other law enforcement
agencies with authorisation of the competent authority of
Japan and vice versa.
The protocol also provides that both India and Japan shall
lend assistance to each other in the collection of revenue
claims. The protocol further provides for exemption of
interest income from taxation in the source country with
respect to debt-claims insured by the Government/
Government owned financial institutions.
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8. Revision of India-Cyprus DTAA
India and Cyprus have revised the India-Cyprus DTAA and
notifications have been exchanged between both the
countries intimating the completion of internal
procedures. The revised DTAA will be effective from April
01, 2017 and January 01, 2017, in India and Cyprus
respectively.91
Subsequent to Cyprus being declared as Notified
Jurisdictional Area (NJA) in 2013 by Indian Government
there were adverse implications for Cyprus based
investors including inter alia: (i) higher withholding tax
rate, (ii) application of transfer pricing regulations by
considering all the parties to a transaction involving
Indian taxpayer and person based in Cyprus as associated
enterprises, (iii) no allowance of deduction to Indian
taxpayer for expenditure arising from transaction with
person based in Cyprus, unless prescribed documentation
furnished and maintained, (iv) onus on the Indian
taxpayer to explain source of income received from
person based in Cyprus, failure of which will regard such
amount as income of the Indian taxpayer. The revised
India-Cyprus DTAA is the culmination of prolonged
negotiations and discussions.
The Revised DTAA has brought significant revisions to the
provisions of the existing India-Cyprus DTAA. The revised
India-Cyprus DTAA inter alia has following significant
features:
(i) Source based taxation as a result of which capital
gains arising to a Cyprus based investor from the
alienation of shares of an Indian company acquired
on or after April 1, 2017, will be subject to tax in
India. The grandfathering provision will protect the
investments made prior to April 01, 2017. Under the
terms of the existing India-Cyprus DTAA, capital gains
derived from the sale of capital asset situated in India
are not liable to tax in India.
(ii) Scope of permanent establishment has been
widened by including a wider definition of the fixed
place PE, reducing the threshold for constituting
construction PE from 12 months to 6 months,
introducing the service PE clause, widening the scope
of agency PE, etc.
(iii) The revised India-Cyprus DTAA grants exemption to
certain Indian institutions (such as RBI, Export-Import
Bank of India, National Housing Bank) from tax in
Cyprus on interest income earned in Cyprus. The
existing DTAA includes an Article on royalties and fees
for included services which has been amended in the
revised India-Cyprus DTAA. Another Article on the
technical services under the existing India-Cyprus
DTAA has been subsumed within royalty and fees for
technical services (“FTS”) Article under the revised
DTAA. Further, rate of taxation for royalty and FTS
payments have been reduced from 15% to 10%.
(iv) The revised DTAA updates the Article on EOI as per
the international standards, and allows for the use of
such information for purposes other than taxation. A
new Article to facilitate cooperation between both
countries in collection of taxes has also been
introduced.
(Please refer to Cyril Amarchand Tax Alert dated
December 16, 2016 for detailed analysis of revised
India-Cyprus DTAA)
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9. Rules on business connection of offshore funds amended
The Finance Act, 2015 introduced a special regime with
respect to constitution of business connection of an
offshore fund in India. Subsequently, Rule 10V of the IT
Rules was introduced, which were made effective from
March 15, 2016.
Recently, the CBDT has issued a notification dated
November 21, 2016 amending this rule and the
amendments are summarized herein below.
(i) Rule 10V(1)(c) of the IT Rules provides that where the
investment in the fund has been made directly by an
institutional entity, the number of members and the
participation interest in the fund shall be determined
by looking through the said entity, if it is a resident of
a country or specified territory with which an
agreement referred to in section 90(1) or section 90A
(1) of the IT Act has been entered into by India. This is
now extended to cover the entity that is established
or incorporated or registered in a country or a
specified territory notified by the Central Government.
This amendment is effective from the date of its
publication in the Official Gazette.
(ii) Section 9A(4) of the IT Act provides that an eligible
fund manager, in respect of an eligible investment
fund, means any person who is engaged in the
activity of fund management and fulfills the following
conditions, namely:
(a) the person is not an employee of the eligible
investment fund or a connected person of the
fund;
BACK
91. The revised India-Cyprus DTAA was signed on November 18, 2016 and entered into force on December 14, 2016. All the provisions of the revised DTAA
will be given effect to in India from April 01, 2017.
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(b) ….
(c) ….
(d) the person along with his connected persons
shall not be entitled directly or indirectly, to more
than 20% of the profits accruing or arising to the
eligible investment fund from the transactions
carried out by the fund through the fund
manager.
Sub-rule 11 has been inserted to provide that for the
purposes of section 9A(4)(a) of the IT Act, a fund manager
shall not be considered to be a connected person of the
fund merely for the reason that the fund manager is
undertaking fund management activity of the said fund.
Likewise, Sub-rule 12 has been inserted to provide that
any remuneration paid to the fund manager, which is in
the nature of fixed charge and not dependent on the
income or profits derived by the fund from the fund
management activity undertaken by the fund manager
shall not be included in the profits referred to in the said
clause, if the conditions specified in section 9A(3)(m)92 of
the IT Act are satisfied and such fixed charge has been
agreed by the fund manager in writing at the beginning of
the relevant fund management activity. The aforesaid
amendments are effective from March 15, 2016.
The CBDT Notification clarifying the ambiguities is a
welcome move and gives relaxation to meet the eligibility
norms of the offshore fund.
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10. Clarifications on indirect transfer provisions
The indirect transfer provisions were introduced in the
year 2012, with retrospective effect from April 01, 1962.
Under these provisions, share or interest in a foreign
entity shall be deemed to be situated in India, if the share
of interest derives, directly or indirectly, its value
substantially from the assets located in India. A number of
outstanding issues persisted for want of clarity and
machinery provisions. The Indian Government referred
the issues arising in relation to indirect transfers to the
Shome Committee, which issued its recommendations in
the form of a report in October 2012. Some of these
recommendations were given effect to in the year 2015,
when further indirect transfer provisions, that provided
some more clarity with regard to its implementation, were
introduced. In June 2016, the indirect transfer rules were
introduced. For a quick summary of the indirect transfer
rules, please refer our Tax Scout edition for the quarter
ended June 2016.
In this regard, the CBDT has, vide Circular No. 41 of 2016
issued certain clarifications with regard to the applicability
and scope of the indirect transfer provisions. To some
extent, certain clarifications merely reiterate the existing
law. Some of the significant clarifications are summarized
as under:
(i) Foreign Portfolio Investor (“FPI”) structure:
With regard to transfer of investments/ interest in FPI
entities/ funds, the CBDT clarifies that the indirect
transfer provisions will be applicable to investors of FPI
entities/ funds, if the FPI entity/ funds derive its value
substantially from assets located in India, subject to the
exemption available under Explanation 793 to section 9(1)
(i) of the IT Act.
(ii) Feeder fund structures:
For transfer of investments/ interest in feeder funds,
which invests in a master fund, which in turn invests in
the Indian securities, the CBDT clarifies that where the
conditions of Explanation 7(a)(ii) to section 9(1)(i) of the IT
Act are fulfilled, the income of the non-resident investors
from the transfer of their interests in feeder funds would
not be deemed to accrue or arise in India.
BACK
92. Section 9A(1) of the IT Act provides that notwithstanding anything contained in section 9(1) of the IT Act and subject to the provisions of this section, in
the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall
not constitute business connection in India of the said fund. Further, section 9A(3)(m) of the IT Act provides that the remuneration paid to an eligible
fund manager in respect of the fund management activity undertaken by him should not be less than the arm’s length price of the said activity so as to
be eligible to be an eligible investment fund referred to in section 9A(1) of the IT Act.
93. Explanation 7 (a)(i) to section 9(1)(i) of the IT Act provides that the indirect transfer provisions shall not apply if; (i) the foreign company or entity (whose
shares or interest is being transferred) directly owns assets in India; and (ii) the transferor (whether individually or along with its associated enterprises),
at any time in the twelve months preceding the date of transfer, neither holds the right of management or control in relation to such foreign company or
entity, nor holds voting power or share capital or interest exceeding 5% of the total voting power or share capital or interest of such foreign company or
entity.
Explanation 7(a)(ii) to section 9(1)(i) of the IT Act provides that the indirect transfer provisions shall not apply if; the foreign company or entity (whose
shares or interest is being transferred) indirectly owns assets situated in India and the transferor (whether individually or along with its associated
enterprises), at any time during 12 months preceding the date of transfer, neither holds the right of management or control in relation to such company
or entity, nor holds any right in or in relation to such company or entity, which would entitle him to the right of management or control in the company or
entity that directly owns the assets situated in India, nor holds such percentage of voting power or share capital or interest in such company or entity
which results in holding of (either individually or along with its associated enterprises) a voting power or share capital or interest exceeding 5% of the
total voting power or total share capital or total interest, as the case may be, of the company or entity that directly owns the assets situated in India.
(Explanation 7(a)(i) and (ii) collectively referred to as “small investors”)
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(iii) Nominee/ distributor structure94:
Income of the non-resident investors from the transfer of
their interests in nominee/ distributor entity would not be
deemed to accrue or arise in India, if the conditions of
Explanation 7(a)(ii) to section 9(1)(i) of the IT Act are
fulfilled.
(iv) Offshore fund:
The indirect transfer provisions will apply only if the
Offshore fund derives its value substantially from assets
located in India, irrespective of the shareholding of the
ultimate investors in the offshore fund.
(v) Transfer of shares or units of an offshore listed fund/
entity:
The indirect transfer provisions will apply to the investors
of the offshore listed fund/ entity, if the shares or units
offshore listed fund/ entity derive its value substantially
from the assets located in India, subject to the exemption
available to small investors.
(vi) Amalgamation of offshore corporate entities and non-
corporate entities:
In case of corporate entities, the CBDT clarifies that the
carve out under section 47(viab)95 of the IT Act applies
only to corporate entities and does not extend to
shareholders/ investors of the amalgamating foreign
company and therefore, the indirect transfer provisions
shall apply to such investors/ shareholders of the
amalgamating foreign company. It has been further
clarified since section 47(viab) of the IT Act covers only
corporate entities, the indirect transfer provisions shall be
applicable in case of an amalgamation between the non-
corporate entities.
(vii) Reporting requirements of Indian concerns:
Since the provisions have been recently introduced, the
CBDT has stated that the practical implementation should
first be seen. Thus, there is no guidance provided by the
CBDT on the practical nuisances involved in reporting the
indirect transfer.
It may also be noted that even though the Finance Act, 2015
introduced further clarity with regard to implementation of
indirect transfers in India and the rules notified in June 2016
lay down, inter alia, the manner in which the valuation of
assets is require to be undertaken, there are some aspects
such as; (i) which “internationally accepted valuation
methodology” is to be adopted, (ii) manner of computing the
capital gains especially in relation to cost of acquisition and
period of holding, etc. which are still ambiguous and the
Circular does not touch upon any of such uncertainties.
While we await further clarifications on these aspects, it would
be interesting to see the manner in which these provisions are
being implemented in the mean time and the reaction of the
income tax department as well.
While the Circular does not explicitly mention about P-note
holders96, the applicability of the indirect transfer provisions to
the P-note investors shall have to be examined on a case to
case basis and other aspects of the transaction such as
withholding tax, compliances, etc. shall have to be separately
taken care of. With stricter SEBI norms and imposition of
taxes in the event the indirect transfer provisions are
triggered, it would be interesting to see whether P-notes would
still be a preferred investment route.
In view of the concerns raised by various stakeholders (FPIs,
venture capital funds and other stakeholders), that this could
involve multiple taxation of the same income, it is pertinent to
note that CBDT vide press release dated January 17, 2017,
the operation of this Circular is kept in abeyance until decision
is made addressing such concerns.
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11. Draft rules prescribing the method of valuation of the fair
market value in respect of charitable or religious trust or
institution
The Finance Act, 2016 introduced a new Chapter XII-EB97
laying down special provisions relating to tax on “Accreted
Income” (“AI”) of certain trusts and institutions. As per
newly introduced provisions98, the AI of a trust or
institution registered under section 12AA of the IT Act
(“Organization”), as on the specified date99, shall be
subject to tax at the Maximum Marginal Rates (“MMR”)
under certain circumstances100.
BACK
94. Nominee/distributor entity pools funds from investors for an Offshore Fund (registered as FPI), which invests in the Indian securities.
95. Section 47(viab) of the IT Act provides that any transfer, in a scheme of amalgamation, of a capital asset, being a share of a foreign company (as
referred to in Explanation 5 to section 9(1)(i) of the IT Act) which derives its value substantially from share or shares of an Indian company held by the
amalgamating foreign company to the amalgamated foreign company shall not be regarded as a taxable transfer if certain conditions are fulfilled.
96. Issued by SEBI registered FPIs to other offshore entities who are looking for exposure in Indian markets without getting registered directly.
97. Section 115TD, 115TE and 115TF (effective from June 1, 2016).
98. Section 115TD of the IT Act.
99. As per the Explanation to section 115TD of the IT Act, “specified date” means the date of conversion, the date of merger, the date of dissolution, as the
case may be.
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The AI means the excess of the aggregate FMV of the total
assets of the trust or the institution, as on the specified
date, over the total liability of such trust or institution, to
be computed in accordance with the method of valuation
as may be prescribed.
On October 24, 2016, the CBDT issued draft rules (Rule
17CB), prescribing the method of valuation for the
purposes of computing the AI.101 The draft rules provide
for determination of the FMV of: (i) shares and securities;
(ii) immovable property; (iii) business undertaking; and (iv)
any asset other than those specifically covered above. It
also provides that the total liability of the Organization
shall be the book value of liabilities on the specified date
excluding certain specific liabilities102 as prescribed.
BACK
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100. (i) If the organization is converted into any form which is not eligible for grant of registration under section 12AA of the IT Act; (ii) If the organization gets
merged into any entity which is a trust or institution having objects similar to it and registered under section 12AA of the IT Act; and (iii) If the
organization, in case of dissolution, fails to transfer all its assets to entities registered under section 12AA of the IT Act and section 10(23C)(iv), (v), (vi)
and (via) of the IT Act within 12 months from the end of the month in which the dissolution takes place (Section 115TD(1) of the IT Act).
The amended provisions also provide for certain cases where a trust or institution registered under section 12AA of the IT Act shall be deemed to have
been converted into any form not eligible for registration under section 12AA of the IT Act (Section 115TD(3) of the IT Act).
101. Last date for submission of comments and suggestions by stakeholders and general public was October 31, 2016.
102. (i) Capital fund or accumulated funds or corpus, by whatever name called, of the trust or institution; (ii) reserves or surplus or excess of income over
expenditure, by whatever name called, (iii) any amount representing contingent liability; (iv) any amount representing provisions made for meeting
liabilities, other than ascertained liabilities; (v) any amount representing provision for taxation, other than amount of tax paid as deduction or collection
at source or as advance tax payment as reduced by the amount of tax claimed as refund under the IT Act, to the extent of the excess over the tax
payable with reference to the income in accordance with the law applicable thereto.
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GLOSSARY
ABBREVIATION MEANING
AAR Hon’ble Authority for Advance Rulings
ACIT Learned Assistant Commissioner of Income Tax
AO Learned Assessing Officer
APA Advance Pricing Agreement
AY Assessment Year
CA, 1956 Companies Act, 1956
CA, 2013 Companies Act, 2013
CBDT Central Board of Direct Taxes
CBEC Central Board of Excise and Customs
CCR CENVAT Credit Rules, 2004
CEA Central Excise Act, 1944
CENVAT Central Value Added Tax
CESTAT Hon’ble Customs, Excise and Service Tax Appellate Tribunal
CETA Central Excise Tariff Act, 1985
CIT Learned Commissioner of Income Tax
CIT(A) Learned Commissioner of Income Tax (Appeal)
CST Central Sales Tax
CST Act The Central Sales Tax Act, 1956
Customs Act The Customs Act, 1962
DCIT Learned Deputy Commissioner of Income Tax
DDT Dividend Distribution Tax
DGCEI Directorate General of Central Excise Intelligence
DIT Learned Director Income Tax
DTAA Double Taxation Avoidance Agreement
EOI Exchange of Information
FA The Finance Act, 1994
FMV Fair Market Value
FY Financial Year
GAAR General Anti Avoidance Rules
GST Goods and Service Tax
HC Hon’ble High Court
IDS Income Declaration Scheme, 2016
INR Indian Rupees
IRA Indian Revenue Authorities
IT Act Income Tax Act, 1961
IT Rules Income Tax Rules, 1962
ITAT Hon’ble Income Tax Appellate Tribunal
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GLOSSARY
ABBREVIATION MEANING
LOB Limitation of Benefits
Ltd. Limited
MAP Mutual Agreement Procedure
MAT Minimum Alternate Tax
OECD Organisation for Economic Co-operation and Development
PAN Permanent Account Number
PE Permanent Establishment
Pvt. Private
RBI Reserve Bank of India
SC Hon’ble Supreme Court
SCN Show Cause Notice
SEBI Securities Exchange Board of India
SLP Special Leave Petition
ST Rules Service Tax Rules, 1994
UOI Union of India
USD United States Dollar
VAT Value Added Tax
WDV Written Down Value
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DISCLAIMER
This Newsletter has been sent to you for informational purposes only and is intended merely to highlight issues. The
information and/or observations contained in this Newsletter do not constitute legal advice and should not be acted upon in
any specific situation without appropriate legal advice.
The views expressed in this Newsletter do not necessarily constitute the final opinion of Cyril Amarchand Mangaldas on the
issues reported herein and should you have any queries in relation to any of the issues reported herein or on other areas of
law, please feel free to contact us at the following co-ordinates:
Cyril Shroff
Managing Partner
Email: [email protected]
S. R. Patnaik
Partner
Email: [email protected]
Mekhla Anand
Partner
Email: [email protected]
This Newsletter is provided free of charge to subscribers. If you or anybody you know would like to subscribe to Tax Scout,
please send an e-mail to [email protected], providing the name, title, organization or company, e-mail address, postal
address, telephone and fax numbers of the interested person.
If you are already a recipient of this service and would like to discontinue it or have any suggestions and comments on how we
can make the Newsletter more useful for your business, please email us at [email protected].
ACKNOWLEDGEMENTS
We acknowledge the contributions received from S.R.Patnaik, Mekhla Anand, Kalpesh Unadkat, Shruti KP, Thangadurai V.P.,
Kiran Jain, Rupa Roy, Shiladitya Dash, Niyati Dholakia, Darshana Jain, Bipluv Jhingan and Gurkaran Singh Arora under the
overall guidance of Mrs. Vandana Shroff.
We also acknowledge the efforts put in by Madhumita Paul and Avishkar Malekar to bring this publication to its current shape
and form.
Cyril Amarchand Mangaldas
v floor, peninsula chambers, peninsula corporate park, lower parel, mumbai - 400 013
