Tax DigestQuarterly newsletterMarch 2018

2 Tax Digest

We are pleased to present the March 2018 edition of EY’s quarterly newsletter Tax Digest, which summarizes significant tax and regulatory developments during the October to December 2017 quarter.

This newsletter is designed as a ready reckoner and covers landmark tax judgments, updates on tax treaties and alerts on topical developments in the tax arena. The “In the press” section includes articles published by us on the tax realm over the last quarter. It also details key thought leadership reports and other topics of interest for tax professionals.

We hope you find this edition timely and insightful.

Best regards,EY Tax Update team

Dear readers,

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Direct tax

• Verdicts

• Significant Supreme Court (SC) rulings

• SC mandates “small scale industry” condition compliance for entire tax-holiday period

• SC applies purpose test to determine nature of subsidy

• Rulings on profit-linked incentives

• Profit-linked deduction benefit to commence only from the date of EOU certification and not from commencement of manufacturing activities alone

• Himachal Pradesh HC rules new units undertaking “substantial expansion” entitled to 100% deduction for fresh five years

• Rulings on classification of expenditure

• Delhi Tribunal upholds revenue deduction of upfront fee to obtain long-term lease of airport land to operate and modernize airport

• Mumbai Tribunal rules annual franchise fees as deductible revenue expenditure

3 Tax Digest

• Rulings on capital gains

• Bombay HC upholds denial of long-term capital gains exemption for dubious and unexplained transactions in shares

• Mumbai Tribunal rules stamp duty value cannot be deemed as consideration while computing capital gains arising on contribution of land by a partner to the partnership firm

• Kolkata Tribunal holds Taxpayer as investor in shares and rejects taxation of gains as business income

• AAR rules transfer of shares in a German company by German shareholders does not trigger tax in India

• Is there a permanent establishment (PE)?

• AAR rules on fixed permanent establishment and disposal test in a service arrangement

• Mumbai Tribunal evaluates PE risk under India-Singapore tax treaty

• Other significant rulings

• Kerala HC rules accrued FD interest is not hypothetical income and same shall be chargeable to tax

• Delhi Tribunal rules guarantee fee income received by foreign parent from Indian subsidiary is taxable in India

• Mumbai Tribunal upholds the deductibility of sales promotion expenditure incurred by a pharma company

• Delhi HC allows treaty rate over the higher tax rate under the ITL in the absence of Permanent Account Number (PAN)

• Hyderabad Tribunal rules withholding tax liability on actual sale consideration, rejects taxpayer’s plea of non-discrimination (ND) application on withholding provisions

• AAR rules income from offshore supply not taxable under ITL

• Rajkot Tribunal grants India-UAE DTAA benefits on shipping income and rules on applicability of limitation of benefits (LOB) clause

• Recent decisions on taxation of royalty/fees for technical services (FTS) payments

• From the tax gatherer’s desk

• Indian Tax Administration relaxes norms for MAP and bilateral APAs

• CBDT issues instruction for non-recovery of tax demands from start-up companies issuing shares at premium value

• CBDT releases FAQs on the new taxation regime for capital gains on transfer of equity shares and other securities

• Treaty updates

• Revised India-China tax treaty to incorporate minimum standards and other changes under the base erosion and profit shifting (BEPS) project

• Protocol to treaty between Brazil and India enters into force

• India signs tax treaty with Iran

• Happenings across the border

• Organisation for Economic Co-operation and Development (OECD) launches International Compliance Assurance Programme (ICAP) pilot

• OECD releases country approaches to Country-by-Country Reporting Guidance and adds additional questions

• Six additional jurisdictions sign the Multilateral Convention (MLI) to implement tax treaty related measures to prevent BEPS

4 Tax Digest

Indirect tax

• Case laws

• Customs duty

• High Court, Delhi

• Circular restricting interest on delayed refund of SAD struck down

• Tribunal, New Delhi

• Consideration for granting distribution rights cannot be treated as royalty and hence cannot be included in the transaction value

• Tribunal, Bangalore

• Duty not payable on goods imported based on the certificate from STPI authorities

• Foreign trade policy (FTP)

• High Court, Delhi

• Export obligation period cannot be extended on mere “hardship” plea; current FTP procedures enforceable

• High Court, Delhi

• TED refund granted on goods supplied to EOUs; deemed export provisions are unambiguous

• Central Excise

• High court, Allahabad

• In absence of evidence for clandestine removal, levy of penalty is unsustainable

• Tribunal, New Delhi

• Undertaking manufacture making use of technical know-how and specifications of goods as supplied by customer held to be job work; valuation to be done as per Rule 10A

• Tribunal, Chennai

• Denial of excise duty exemption on goods supplied for UN projects is unjustifiable

• CENVAT credit

• Supreme Court

• CENVAT credit on outward transportation from place of removal is eligible prior to 01 April 2008

• Tribunal, Mumbai

• CENVAT credit not required to be reversed if the shortage in stock is within tolerance limit

• Service tax

• Supreme Court

• Value of free of cost supplies not includible in gross amount charged for levying Service tax

• High Court, Delhi

• HC rejects utilization of accumulated credit of Education Cess and Secondary and Higher Education Cess for the payment of Service tax

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• Tribunal, New Delhi

• In case prices are statutorily regulated, tax payment is on provisional basis and gets finalized only when the debit/credit note is issued

• Tribunal, New Delhi

• Service recipient outside India and receipt of convertible foreign exchange constitute exports

• Tribunal, Allahabad

• No demand can be sustained unless it is based on a proposal in the show cause notice

• Value Added Tax/Central Sales tax

• Supreme court

• Post-sale discounts - deductible from taxable turnover

• High Court, Gujarat

• Manufacturing pipes using steel plates for use in pipeline laying contract constitutes sale

• High Court, Allahabad

• “Charger” in singular retail “mobile” package not taxable separately

• High Court, Madras

• HC affirms local levy on goods purchased through e-auction; bidding from outside state inconsequential

• Key statutory updates

• Customs duty

• Foreign Trade Policy (FTP)

• Central Excise

• Value Added Tax (VAT)/Central Sales tax (CST)

• Goods and Services Tax (GST)

Regulatory

• Foreign Exchange Management Act (FEMA) 1999

• Foreign direct investment (FDI) policy

In the press

Compilation of alerts

• Direct tax

• Indirect tax

• Regulatory

Budget updates

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7 Tax Digest

Verdicts!

Significant Supreme Court (SC) rulingsSC mandates “small scale industry” condition compliance for entire tax-holiday period

In the case of the Ace Multi Axes Systems Ltd. [TS-571-SC-2017], the issue before the SC was whether the benefit of the tax holiday that is available to small-scale industries (SSIs) under a specific provision1 of ITL will be available to the taxpayer if the taxpayer ceases to be an SSI during the tax holiday period of 10 consecutive years.

The SC held that incentive meant for SSI undertakings cannot be availed by industrial undertakings that do not continue as SSIs during the relevant tax holiday period. The SC disagreed with the logic of the Karnataka HC, which had stated that since the object of the legislature is to encourage industrial expansion, it implies that incentive should remain applicable to an SSI even where on account of industrial expansion, the taxpayer ceases to be an SSI. Referring to the specific provision, the SC ruled that the scheme of the statute does not indicate that the tax holiday has to continue for 10 consecutive years irrespective of continuation of eligibility conditions. The SC ruled that if an industrial undertaking does not remain an SSI, it cannot claim the incentive, even if in the initial year eligibility was satisfied.

SC applies purpose test to determine nature of subsidy2

In case of the Chaphalkar Brothers [TS-589-SC-2017], the issue before the SC was whether subsidies granted by state governments of India by way of exemption from entertainment tax to newly constructed multiplexes would qualify as capital receipt under the Indian Tax Laws (ITL). The SC, after taking note of the object of the subsidy scheme and reason for introducing the said scheme, held that the subsidy was granted to the taxpayer for promoting the construction of new cinema houses in the state and not to support the ongoing activities of multiplexes and, hence, it was capital in nature. The SC, by applying the “purpose test” as laid down by it in earlier rulings3, held that the

source of funds for the scheme and the form of the scheme are irrelevant.

(For further details, please click here for our alert dated 18 December 2017)

Rulings on profit-linked incentivesProfit-linked deduction benefit to commence only from the date of EOU certification and not from the commencement of manufacturing activities alone

In the case of All Koshys All Spices [TS-605-HC-2017(KER)], the taxpayer was a proprietorship firm that later got converted into a partnership firm. It commenced its manufacturing business in the year 1997-98 and was issued the certificate of being a 100% export oriented units (EOU) in the year 1999-2000. The issue before the Kerala HC was whether the tax holiday under a specific provision4 of the ITL was available to the taxpayer from the year where it started its manufacturing business (FY1997-98) or from the year of its inception as a 100% export-oriented undertaking (FY1999-2000).

The HC held that the tax holiday benefit shall be available to the taxpayer from the year of its inception as a 100% export-oriented undertaking, i.e., FY 2000-01, and not from the year on which the manufacture was commenced, i.e., FY 1997-98). The HC referred to the specific provision and opined that the term “manufacture” referred in the provision is one commenced pursuant to the certification of a 100% export-oriented undertaking. The HC held that in the present case, it cannot be said that the taxpayer, a 100% EOU, is eligible from the year in which it commenced manufacture, since in that relevant year, the taxpayer was not a 100% EOU unit. It also ruled that as the benefit is being conferred only on a 100% EOU, the exemption could commence only from its certification and if there is no manufacture at the time of certification, the exemption shall be available from the time of commencement of manufacture.

Hence, the HC held in favor of the taxpayer and ordered that benefits of the relevant provision shall be applied from AY2000-01.

Direct tax

1 Section 80-IB of the Act

2 From the tax year 2016-17 vide the Finance Act, 2015, there is change in law that makes subsidy taxable. However, it exempted the subsidy, which is in being met directly or indirectly to the portion of the cost of asset acquired

by the taxpayer, and is provided by the Central or state government or any authority established under any law or by any other person.

3 Sahney Steel & Press Works Ltd. (1997) 228 ITR 253 (SC) , Ponni Sugars and Chemicals Ltd. (2008) 306 ITR 392 (SC)

4 Section 10B of the Act provided for deduction of such profits as are derived by a 100 export -oriented undertaking from the export of articles or things or computer software for a period of 10 consecutive assessment years

beginning with the AY relevant to the PY in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee.”

8 Tax Digest

Himachal Pradesh HC rules new units undertaking “substantial expansion” entitled to 100% deduction for fresh five years

In the case of Stovekraft India (Taxpayer) [[TS-570-HC-2017(HP)], the issue before the Himachal Pradesh HC was whether an industrial unit set-up in specified areas on or after 07 January 2003 (the cut-off date) is entitled to a fresh five-year profit-linked incentive deduction of 100% under Section (S.) 80-IC5 of the ITL if such unit undertook “substantial expansion” on or before the sunset date of 31 March 2012.

As per the Tax Authority, a new unit set-up during the qualifying period cannot avail a fresh tax holiday benefit as is available for “substantial expansion,” i.e., the benefit of “substantial expansion” is restricted to old units set up prior to the cut-off date. The lower authorities (including the Tribunal) supported this interpretation. However, the HC ruled in favor of the Taxpayer. The HC held that a plain and literal interpretation of S.80-IC suggests that it does not create a distinction between the old units set up prior to the cut-off date and the new units set up thereafter. Therefore, the new units that have undertaken “substantial expansion” before the sunset date are entitled to a fresh tax holiday of 100% for the first five years and 25%/30% for the next five years, subject, however, to the overall tax holiday period not to exceed 10 years from the initial year industrial unit begins to manufacture or produce articles or things.

(For further details, please click here for our alert dated 06 December 2017)

Rulings on classification of expenditureDelhi Tribunal upholds revenue deduction of upfront fee to obtain long-term lease of airport land to operate and modernize airport

In case of Delhi International Airport Limited (Taxpayer) [TS-597-ITAT-2017(DEL)], an agreement was entered into between the Airport Authority of India (AAI) and the Taxpayer for the operation, management and development

of the airport. The issue before the Delhi Tribunal was whether fee termed as “upfront fee” of INR150 crore, which was required to be paid by the Taxpayer to AAI, is capital or revenue in nature.

The Tribunal at the outset noted that the payment of aforesaid fee was apparently made for obtaining long-term lease of airport land to operate and modernize the airport, as opposed to obtaining concessionaire right. In the facts of the case, the Tribunal observed that the fees, which represented a one-time lease premium, was in the nature of advance lease rental paid upon the grant of the lease so that recurring lease rentals charged would be nominal. The Tribunal granted full deduction in the year of payment as revenue expenditure, noting that there was no concept of deferring revenue expenditure over the lease term under the ITL.

Mumbai Tribunal rules annual franchise fees as deductible revenue expenditure

In case of the Knight Riders Sports Pvt. Ltd. (an Indian company) [TS-609-ITAT-2017(Mum)], the core issue under consideration was whether the annual franchise fees paid by the Taxpayer to the BCCI6 was deductible as revenue expenditure. The Tribunal, based on the terms of the franchise agreement and various tribunal decisions7, held that the payment of the franchise fees only facilitated participation in the league and operation of the team for the year for which the payment pertained. It did not result in the creation of an asset nor in the generation of a benefit of an enduring nature. Hence, the annual payment of the franchise fees was deductible as revenue expenditure under the ITL.

(For further details, please click here for our alert dated 05 January 2018)

Rulings on capital gainsBombay HC upholds denial of long-term capital gains exemption for dubious and unexplained transactions in shares

In the case of Smt. Shantidevi Bimalchand Jain (Taxpayer) [TS-570-HC-2017(HP)], the Taxpayer had purchased

5 S.80-IC grants a profit-linked tax holiday for two types of units: (a) a new unit that commenced manufacture or production during a prescribed qualifying period in a specified area and (b) an existing unit in

a specified area that undertakes “substantial expansion” during the qualifying period. The tax holiday is 100% for the first five years and 25% (30% for companies) for the next five years for units based in

northern states of Himachal Pradesh and Uttaranchal with the qualifying period between 07 January 2003 and 31 March 2012– subject to the overall limit of 10 years.

6 The BCCI is the national governing body for cricket in India.

7 India Win Sports Pvt. Ltd. [ITA No. 5290 & 5291/Mum/2014]; Deccan Chargers Sporting Ventures [ITA No. 1043/Hyd/2013]; and India Cement Ltd. [ITA No. 1342/Mds/2010]

9 Tax Digest

shares of two private limited companies for a petty amount. These companies got merged into a listed company after a short while. In the next year, the Taxpayer transferred the listed company’s shares for an exorbitant sum and claimed the resultant income as long-term capital gains eligible for capital gains exemption under the provision of the ITL. The issue before the HC was limited to the characterization of income from share transactions as capital gains or business income, since if the income was characterized as capital gains, the Taxpayer would get exemption on long-term capital gains for sale of a listed company’s shares through a stock exchange.

The HC upheld the denial of long-term capital gains exemption and approved the treatment of transactions as an “adventure in the nature of trade,” liable to be taxed as business income, considering that the acquisition of shares was with a clear intention to exit after making a super-natural profit. The lack of evidence on the genuineness of transactions and the inability of the Taxpayer to explain the sudden spurt in the share price also led to the denial of the exemption. The HC held that routing of money through a bank account was not sufficient to prove the genuineness of the transactions.

(For further details, please click here for our alert dated 19 December 2017)

Mumbai Tribunal rules stamp duty value cannot be deemed as consideration while computing capital gains arising on contribution of land by a partner to the partnership firm

In case of Amartara Pvt. Ltd. (Taxpayer) [TS-612-ITAT-2017(MUM)], the Taxpayer had transferred land to a limited liability partnership (LLP) by way of capital contribution and computed gains arising on such transfer, by taking the value of such land recorded by the LLP in its books as the full value of consideration in terms of a specific provision8 in ITL instead of the higher value adopted for stamp duty purposes. The issue before the Tribunal was whether value adopted for stamp duty purposes can be deemed as the full value of consideration while computing capital gains arising on contribution of land by a partner to the partnership firm.

Under the ITL , gains arising from transfer of a capital asset by a partner to a partnership firm by way of capital contribution is governed by a specific provision8 as per which the amount recorded in the books of the partnership firm as the value of capital asset is deemed as the consideration arising on such transfer. Further, the ITL contains a deeming provision that in a case where land or building is transferred at a value lower than the value adopted for stamp duty purpose, such stamp duty value shall be deemed as the full value consideration arising on such transfer.

The Tribunal ruled in favor of the Taxpayer and held that capital gains arising from the contribution of land into a firm is to be computed by considering the value recorded in the books of the LLP. The Tribunal observed that a specific provision is created in the ITL for taxing cases of transfer between partner and partnership firm. Accordingly, the Tribunal held that the specific provision itself deems how the full value of consideration should be determined in special cases. The Tribunal also held that another deeming fiction relating to stamp duty value cannot be imported while computing the deemed full value of consideration. In this regard, the Tribunal relied on the SC ruling in the case of Moon Mills Ltd. (59 ITR 574), which held that that scope of one deeming fiction cannot be extended by importing another deeming fiction.

(For further details, please click here for our alert dated 05 January 2018)

Kolkata Tribunal holds Taxpayer as investor in shares and rejects taxation of gains as business income

In case of Everest Finance & Investment Co. (Taxpayer) [TS-583-ITAT-2017(Kol)], the limited issue before the Tribunal was whether the profit from the sale of the shares (which were held for less than 12 months) was to be treated as business income or as short-term capital gains (liable to a lower rate of taxation).

The Tribunal noted that the Taxpayer had made investment in shares mostly out of own funds with the intention of earning dividend, and the Taxpayer had disclosed such shares as “investment” in its balance sheet. It also noted

8 S.45(3) of ITA provides that when any person transfers the capital asset to firm, the amount which shall be chargeable to tax in hands of that person shall be the amount recorded in the books of accounts

of the firm.

10 Tax Digest

that the average period of holding of various scrips was more than 200 days and there were no repetitive purchase and sale of scrips.

The Tribunal held that irrespective of the holding period, it is not wrong for an investor to exit from the scrip at the right time by way of capital appreciation or if the market news poses a threat on a particular scrip as a bad investment decision. The Tribunal also relied upon an HC ruling9 wherein it was held that the benefit of short-term capital gains can be availed of for any period of retention of shares up to 12 months. The Tribunal noted that although a ceiling of 12 months for short-term capital gains has been provided, there is no indication as regards the floor, which can be as little as one day. The Tribunal rejected the tax authority’s contention on the treatment of gains on two scrips as speculative in nature after perusing the documents on records, and held that transactions on the said scrips were made in the delivery-based segment and thus, provisions relating to “speculative transactions” were inapplicable.

Based on the above, the Tribunal ruled in favor of the Taxpayer and treated it as an investor in shares and held the profit from sale of shares as short-term capital gains liable to lower rate of taxation and not as “business income.”

AAR rules transfer of shares in a German company by German shareholders does not trigger tax in India

In the case of GEA Refrigeration Technologies GmbH (AAR No. 1232 of 2012), the Applicant, a German company, had acquired 100% shares in another unrelated German Company (G Co) from German shareholders (Sellers) who were entitled to the benefits of India-Germany tax treaty. GCo, among other assets, held 100% shares in an Indian company (I Co). The fact pattern can be depicted as under:

The issue before AAR was whether the applicant had obligation to withhold taxes while acquiring shares from the German shareholders. The AAR relied on the valuations submitted by the applicant and noted that shares of G Co did not derive their value substantially (i.e., more than 50% of total value of assets of G Co), from I Co. Hence, transfer of G Co’s shares does not trigger indirect transfer taxation in India. The AAR, accordingly, concluded that income arising on account of transfer of shares in a G Co cannot be taxed in India in terms of the ITL.

The AAR also held that even under the Treaty, the right to tax capital gains arising on transfer of shares of a company resident in Germany rests exclusively with Germany. Further, in a scenario where such transfer results in transfer of controlling rights, which are other than shares, the taxation rights are with the resident country of the transferor, i.e., Germany in the present case. The AAR, thus, concluded that there is no withholding obligation on the applicant in the absence of any tax trigger in India.

(For details, refer EY alert dated 18 January 2018)

9 Merlin Holdings P. Ltd. (2015) 375 ITR 118 (Cal)

100%

100%

Sellers

G Co(Germany)

Outside India

India

I Co

Applicant/Acquirer(Germany)

Other assets

Is there a permanent establishment (PE)?AAR rules on fixed permanent establishment and disposal test in a service arrangement

In case of Production Resource Group (Applicant) (TS-626-AAR-2017), the issue before AAR was on taxation of income received from furnishing of lighting and searchlight services during the Commonwealth Games in India, under the India-Belgium tax treaty.

In the facts of the case, the Applicant provided lighting and searchlight services during the opening and closing ceremonies of the Commonwealth Games in India in 2010 on a turnkey basis. The technical scope of work included installation, maintenance, dismantling and removal of the equipment. While the arrangement was entered into for a period of around 114 days, the Applicant’s employees and equipment were present in India for a period of 66 days for preparatory, installation and dismantling of the equipment. For the above services, the Applicant was provided an office space and on-site space to store the equipment at the stadium where the Games were conducted.

In view of the overall facts and the terms of the Agreement, the AAR held that the Applicant had a fixed place PE in terms of the on-site space provided to store its equipment under a lock. Thus, exclusive access and control over such space lay with the Applicant. Additional factors like a comprehensive physical presence throughout the Games, entering into contracts for employing personnel and ability to subcontract insurance for the equipment indicated the existence of a place at the disposal of the Applicant. Furthermore, based on the decision of the SC in the case of Formula One World Championship Ltd.10 , it was held that even though presence in India was for a short duration, it may be sufficient to create a PE given the nature of the business and the continuous presence of the Applicant throughout the period of the Games. Hence, the Applicant’s income, which was attributable to such PE, would be taxable in India under the India-Belgium tax treaty.

(For details, refer EY alert dated 18 January 2018)

Mumbai Tribunal evaluates PE risk under India-Singapore tax treaty

In this case11, the taxpayer, a UAE company, provided technical and professional personnel to its associated enterprise in India (I Co). The issue before the Mumbai Tribunal was whether the fees received by the Taxpayer for providing such personnel was taxable in India.

The Taxpayer contended that since the India-UAE tax treaty did not have any specific clause on taxability of fees for technical services, the said receipt was covered under business profits article and in the absence of PE in India, it was not taxable in India. On the other hand, the tax authority contended that the Taxpayer had a PE in India basis an earlier AAR ruling12 issued in the case of entities of the same group, wherein it was held that such group entities have a PE in India and hence the income of group entities is taxable in India. However, the Tribunal stated that the tax authorities should not have merely relied on the ruling of the AAR for the Taxpayer’s case and should have gone into the details of the facts of the Taxpayer.

The Tribunal noted for trigger of service PE under the India-UAE tax treaty, the employees need to be present in India for more than nine months. This condition is not fulfilled in the Taxpayer’s case since the employees were present for only 156 solar days and hence, service PE is not triggered. Further, the Tribunal noted that there was no fixed place of business or any specific place earmarked that was at the disposal or control of the Taxpayer in India, and hence held that the Taxpayer had no fixed place PE in India. Also, it was noted that the services were provided by the Taxpayer and not received, hence the question of the I Co being treated as a dependent agent of the taxpayer does not arise. Accordingly, there was no dependent agent PE in India as well.

In the absence of a PE in India, it was held that the fees received by the Taxpayer for providing technical and professional personnel to I Co was not taxable in India.

11

10 TS-161-SC-2017

11 [TS-27-ITAT-2018(Mum)]

12 [2014] 362 ITR 134 (AAR - New Delhi). Refer EY alert dated 21st Feb 2014 for detailed discussion on the AAR ruling.

Tax Digest12

Other significant rulingsKerala HC rules accrued FD interest is not hypothetical income and shall be chargeable to tax

In the case of Plantation Corporation Of Kerala Ltd. (Taxpayer) [TS-611-HC-2017(KER)], the issue before the HC was whether interest income from Bank deposits of the Taxpayer which accrued but was not due to the Taxpayer as at the end of tax year could be assessed to tax in the year of accrual. In this case, the Taxpayer had earned INR76 million as interest income, which was credited to the P&L account but had offered income of only INR42 million for tax purposes. The Taxpayer disclosed the difference of INR32 million in the balance sheet as interest receivable on fixed deposits and claimed that it was only a hypothetical income since the right to receive it had not accrued.

The HC observed that the Taxpayer followed the mercantile system of accounting and it had exercised the option to let the interest accumulate to the deposit and thereby earned compound interest by the end of the deposit term. The HC held that Interest for the period in which the amounts stood in deposit accrues on the close of the previous year and if it so accrues, it becomes taxable income of that particular tax year. If the Taxpayer chose to close the deposit prematurely on any date, then the bank is liable to pay interest accrued till that date.

The HC rejected the argument that since tax was not withheld by the Bank, the interest amount was not taxable. The HC held that the amount that is to be received as interest is known to the Taxpayer and was accounted as income accrued by way of interest in the account books of the Taxpayer following the mercantile system. Hence, the interest income that accrued cannot, by any stretch of imagination, be termed as hypothetical income. The HC ruled in favor of the Tax Authorities and held that interest that is accrued but not due on bank deposits shall be taxable under ITL in the hands of the Taxpayer.

Delhi Tribunal rules guarantee fee income received by foreign parent from Indian subsidiary is taxable in India

In the case of Johnson Matthey PLC (Taxpayer) [TS-578-ITAT-2017(DEL)], a foreign company, the issue before the Delhi Tribunal was the taxation of guarantee fee received by a foreign parent company from its Indian subsidiaries. In the present case, the Taxpayer, a foreign company (F Co), had provided a corporate guarantee under a global agreement to a foreign bank on behalf of its two Indian subsidiaries, for which it received guarantee fee from them. While filing its return of income, F Co offered guarantee fee to tax as “interest” income at 15% as per Article 12 of the India-UK Double Taxation Avoidance Agreement (DTAA).

The Tax Authority disputed the characterization of guarantee fee as “interest” income and asserted that it is taxable at the full rate of 40% under the “Other Income” Article 23 of the DTAA. F Co raised an alternative plea before the Tribunal that guarantee fee income is not taxable in India since it did not accrue or arise in India. At the most, it is in the nature of business income which, in the absence of a PE in India, is not taxable in India. The Tribunal admitted the additional ground.

The Tribunal upheld the Tax Authority’s contention and held that guarantee fee income is taxable in India. Furthermore, it is not in the nature of “interest” income despite the wide scope of the definition of “interest” as per the domestic tax laws of India. It is also not “interest” covered by Article 12(5) of the DTAA. Guarantee fee cannot be characterized as “interest” under the ITL as well as under the DTAA, since F Co did not have privity with the loan agreement between the foreign lender and the Indian subsidiary. Guarantee fee is also not in the nature of business income since F Co was predominantly engaged in the manufacturing business, and not in the business of providing corporate/bank guarantees to earn income on a regular basis. Hence, guarantee fee income is taxable at the full rate under the “Other Income” Article of the DTAA.

(For details, refer EY alert dated 12 December 2017)

13 Tax Digest

Mumbai Tribunal upholds the deductibility of sales promotion expenditure incurred by a pharma company

In the case of Solvay Pharma India Ltd. (Taxpayer) [ITA No. 3585/Mum/2016], during the tax year 2010-11, the Taxpayer, a pharmaceutical company, incurred expenditure in the nature of free medical samples, low-cost branded gift articles and seminars and conferences to create awareness among doctors and medical practitioners about the Taxpayer’s products and key developments in the field of medicine. While the Tax Authority initially allowed the deduction of such expenses, the Commissioner of Income Tax (CIT) held that the allowance of deduction was erroneous and prejudicial to the interests of the revenue as the Tax Authority had not examined the applicability of Circular No. 5/2012 dated 01 August 2012 issued by the CBDT (CBDT Circular). As per the CBDT Circular, payments involving freebies to doctors in violation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (MCI Regulations) are not allowable as deduction in terms of Explanation to S. 37(1) of the ITL, which disallows any expenditure incurred for any purpose that is an offence or prohibited by law.

The Tribunal held that the MCI Regulations are meant to be followed and adhered to by doctors/medical practitioners alone and, hence, they are not applicable to pharma companies. The Tribunal also held that CBDT can only relax the rigors of law and ensure fair enforcement through circulars; it cannot enlarge the scope and the applicability of the MCI Regulations to pharma companies or allied health sector companies and in any case, the CBDT Circular, imposing additional obligation/burden on the taxpayers, cannot be applied retrospectively for the tax year 2010-11. Accordingly, the Tribunal held that the CIT was not justified in passing a revisionary order

(For further details, please click here for our alert dated 24 January 2018)

Delhi HC allows treaty rate over the higher tax rate under the ITL in the absence of Permanent Account Number (PAN)

In case of Danisco India Private Limited [TS-63-HC-2018(DEL)], the limited issue before the Delhi HC was on the applicability of a higher rate of 20% as prescribed under ITL for tax withholding where the payee does not furnish a valid PAN, as compared to the lower tax rate prescribed for payments to non-residents (NR) in the nature of interest/royalty/fees for technical services (FTS) under the relevant tax treaty.

In this regard, the Delhi HC concurred with Pune Tribunal’s decision in the case of Serum Institute of India Ltd13, which held that the higher rate prescribed under the ITL would not prevail over the lower rate under the tax treaties on account of a specific provision in the ITL that permits an NR to claim benefit under the ITL only to the extent it is advantageous. Accordingly, the ITL cannot override the beneficial provisions of the DTAA. Therefore, the lower tax rate prescribed under the DTAA applies whether or not the NR furnishes a valid PAN.

The controversy in the present case appears to be relatable to tax year prior to tax year 2016-17 It may be noted that the relevant provision has been amended from tax year 2016-17 onward to exclude payments to NRs from the applicability of higher withholding if the NRs furnish a tax residency certificate (TRC) and other prescribed information.

Hyderabad Tribunal rules withholding tax liability on actual sale consideration, rejects taxpayer’s plea of non-discrimination (ND) application on withholding provisions

In the case of Shri Bhagwandas Nagla (Taxpayer) [TS-32-ITAT-2018], the issue before the Hyderabad Tribunal was regarding withholding tax obligation on payments made to NR Indians pursuant to the purchase of an immovable property in India. As per the facts of the case, the Taxpayer had purchased an immovable property

13 TITA No. 792/PN/2013. Refer EY Tax Alert dated 07 April 2015 “Pune Tribunal applies treaty rate over the

higher tax rate under the ITL in the absence of Permanent Account Number” in the case of Serum Institute of India

Ltd.

14 Tax Digest

from NR vendors and no taxes were withheld on the payment of consideration for such purchase. The Taxpayer subsequently made good the defaults of non-deduction voluntarily and paid taxes on capital gains computed on the basis of the actual sale consideration.

However, the Tax Authority initiated “assesse-in-default” under ITL provisions and computed capital gains and withholding liability taking stamp duty value of the property as sale consideration. Interest on belated payment was also levied considering such tax liability. Under the ITL, there is a deeming fiction for taxing gains on sale of immovable property as per which if the actual consideration is less than the stamp duty value, then the stamp duty value is taken as sale consideration and according the capital gains income is computed.

The Tribunal held that though the stamp duty value of the property is to be considered while computing tax liability of the NR vendors due to fiction created under the ITL, the payer’s obligation to withhold tax shall be with reference to actual consideration, credited or paid to the vendors. Since the Taxpayer had already paid taxes on the capital gains computed on the actual consideration paid, the Taxpayer cannot be treated as an “assesse-in-default”. However, he shall be liable for payment of interest for belated payment. The Tribunal has also held that ND provisions of the India-US tax treaty may not relieve withholding obligation of the payer as ND provisions are related only to the final tax liability of the recipient of income and do not apply to relieve the withholder’s obligation.

(For details, refer EY alert dated 31 January 2018)

AAR rules income from offshore supply not taxable under ITL

In the case of Michelin Tamil Nadu Tyres Private Limited [TS-20-AAR-2018], the Applicant, an Indian company, was setting up a new manufacturing facility in India. For the purpose, it entered into an agreement with a French group company (F Co) for design, engineering, manufacturing, inspection and packing, forwarding and

dispatch of machinery and equipment from outside India. Subsequently, it also entered into a service agreement with F Co for providing supervisory services during installation of machinery and equipment.

The taxpayer contended that payment made to F Co under the first agreement toward off-shore supply was not taxable in India. However, the tax authority contended that the supply of equipment as well as the services rendered outside India (design engineering) and also the services rendered within India (supervision charges) constitute a composite contract. Accordingly, the entire payment is taxable in India.

On perusal of the agreements, the AAR ruled that the activities of equipment and the services of supervision, respectively, were carried out as per the two clearly demarcated contracts, with different periods of execution and clearly stipulated terms of payment. Accordingly, the two separate contract, one of which is for onshore services, cannot be read together as a composite contract.

Further, the AAR observed that the supply of equipment is a pure off-shore contract for which supply is completed outside India since the title in property is transferred outside India and delivery of equipment is completed outside India. Hence, income from off-shore supply did not accrue or arise in India. Accordingly, it was held that no income from off-shore supply of equipment was taxable in India and hence the taxpayer was not liable to withhold taxes on it. However, with regard to the contract including onshore supervision services, AAR held that the income from such contract was taxable in India since there was a direct and real nexus between the activities of supervision undertaken at the site and the business of F Co. Moreover, it also held that a service PE was formed since F Co was carrying out its supervisory activities through its personnel and hence F Co’s income from such supervisory services was taxable in India and the Taxpayer was obligated to withhold taxes on payments made toward such services.

14 LOB provision of the India-UAE tax treaty provides that an entity which is a resident of a contracting state shall not be entitled to the benefits of the Indo-UAE Tax Treaty if, inter alia, the main

purpose or one of the main purposes of the creation of such entity was to obtain the benefits of Indo-UAE Tax Treaty which would not have been otherwise available.

15 ITO v. MUR shipping DMC Co [ITA No. 405/RJT/2013]

15 Tax Digest

Rajkot Tribunal grants India-UAE DTAA benefits on shipping income and rules on applicability of limitation of benefits (LOB) clause

In case of Martrade Gulf Logistics Solutions Inc. FZCO-UAE [TS-575-ITAT-2017], the Taxpayer, a UAE company whose shares were held by German shareholders, earned income from shipping business in India and claimed non-taxability in India based on Article 8 of the India-UAE tax treaty. However, the Tax Authority denied the benefit of tax treaty by invoking the LOB provision of the India-UAE Tax Treaty14. The Tax Authority contended that the Taxpayer was only registered in the UAE but was managed and controlled outside the UAE and it was formed only to obtain benefit under the India-UAE tax treaty.

The Rajkot Tribunal observed that in order to invoke LOB provisions, one has to establish that the Taxpayer was formed in the UAE only for the purpose of availing benefits of the India-UAE tax treaty. In this regard, the Tribunal

relied on one of its earlier ruling15 wherein it was held that the LOB clause shall be invoked only when the creation of an entity is part of maneuvering, wholly or mainly, to obtain the benefits of the tax treaty which otherwise would not have been available to it.

Under the facts of the case, the Tribunal noted that the entire share capital of the Taxpayer was held by German entities. Even if the income is considered as that of the German shareholders by not treating the Taxpayer as a UAE resident, the India-German tax treaty also provides a similar benefit by providing taxability of shipping income only in the country of residence. Therefore, it was held that whether the company was to be formed in UAE or in Germany, it would not have any material difference so far as non-taxability of said income in India is concerned. Accordingly, the Tribunal allowed the benefit of provisions of India UAE tax treaty covering shipping income of the taxpayer.

(For details, refer EY alert dated 8 December 2017)

Name of the taxpayer/citation

Description of payments

Ruling

[TS-569-ITAT-2017(Kol)]

India-US tax treaty

Payment received for managing, supervising, guiding, coordinating the activities of the Indian subsidiary

• The Taxpayer, a US company, entered into an agreement with its Indian subsidiary (I Co) for rendering services such as managing, supervising, guiding and coordinating the activities of I Co. In this regard, I Co would pay costs actually incurred by the Taxpayer without any markup.

• The Taxpayer did not offer the payment received from I Co to tax on the ground that there was no income element in the payment. However, the Tax Authority contended that the payment qualified as FTS under the India-US tax treaty and taxed such income.

• The Kolkata Tribunal held the services rendered by the Taxpayer did not satisfy the make available test and hence did not qualify as FTS.

• Further, in the absence of a PE of the Taxpayer in India, it was held that income was not taxable even under the business profits article of the India-US tax treaty.

Recent decisions on taxation of royalty/fees for technical services (FTS) payments

16 56 SOT 254

17 305 ITR 208

16 Tax Digest

Name of the taxpayer/citation

Description of payments

Ruling

[TS-62-ITAT-2018 (Mum)]

India-Swiss tax treaty

Receipt of referral fee • The Dubai Branch of the Taxpayer, a Swiss banking company, received a referral fee from its associated enterprise in India (I Co) for referring a client based in India.

• The Tax Authority contended that such fee would qualify as FTS under the India-Swiss tax treaty.

• The Mumbai Tribunal relied on its decision in case of CLSA Ltd.16 and AAR ruling in case of Cushman & Wakefield(s) Pte. Ltd.17 where it was held that “referral fee” qualifies as business income and not FTS.

• Further, it held that since the Indian branch of the Taxpayer played no role in the performance of the referral activity, such income cannot be attributed to such branch office in India. Accordingly, it was held that income was taxable in India.

[TS-70-ITAT-2018(PUN)]

India-US tax treaty

Reimbursement of lease line charges

• The US parent company (US Co) of the Taxpayer entered into an agreement with a third-party service provider to provide bandwidth service and US Co in turn provided bandwidth services to its subsidiaries, including to the Taxpayer, which reimbursed the lease line charges to US Co on a cost-to-cost basis. The Taxpayer did not withhold any taxes on such payment on the ground that there was no income element in such payment.

• However, the Tax Authority contended that considering the retrospective amendment to definition of “royalty” in ITL18 , such lease line charges qualified as “royalty” under ITL as well as the India-US tax treaty.

• The Pune Tribunal relied on the Delhi HC ruling in the case of New Skies Satellite BV & Ors19 and held that unilateral amendments to the ITL cannot be extended to the meaning of any “term” under a tax treaty. Hence, the amended definition of “royalty” in the ITL cannot be read into the definition of the term “royalty” in the tax treaty.

• Further, the Tribunal also observed that the transfer pricing (TP) officer had accepted that payments made by the Taxpayer to US Co were in the nature of reimbursement of expenses.

• Accordingly, it was held that lease line charges were not taxable in India.

Bentley Nevada

[TS-75-ITAT-2018 (Del)]

India-US tax treaty

Payment for supply of software embedded in the hardware

• The Taxpayer, a US company, supplied sophisticated technology equipment, including both hardware and software, to various customers in India. The Taxpayer claimed that income from such sale qualifies as “business income” and not “royalty.”

• The Delhi Tribunal observed that the Finance Act, 2012 made a retrospective amendment20 under the ITL to specifically include computer software within the ambit of “royalty.”

• However, relying on the Delhi HC decision in the case of ZTE Corporation21 and Alcatel Lucent Canada22, the Tribunal ruled that when software is embedded in hardware and there is one composite price, the entire amount remains as business income and a part of it pertaining to software cannot be considered as royalty.

• Hence, it was held that such payment received for software which is embedded in hardware has to be treated as “business profits,” i.e., of the same nature as of the supply of hardware.

18 In 2012, the definition of “royalty” was amended to includes the transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable,

optic fiber or by any other similar technology whether or not such process is secret.

19 (2016) 382 ITR 114

20 By insertion of Explanation 4 to Section 9(1)(vi) of the Act w.e.f. 01.06.1976

21 (2017) 392 ITR 890 (Del)

22 (2015) 372 ITR 476 (Del)

17 Tax Digest

Indian Tax Administration relaxes norms for MAP and bilateral APAs

The Indian Government previously had taken the position that the Mutual Agreement Procedure (MAP) for TP disputes and bilateral Advance Pricing Agreements (APAs) could not be permitted where Article 9(2) or an equivalent article was not present in the tax treaty with the other country (the jurisdiction of the group entity having transactions with India).

Now, through a press release issued on 27 November 2017, the Indian Government has stated that the MAP for TP disputes and the bilateral APA process would be available to taxpayers even where Article 9(2) or the equivalent is not present in the DTAA with the taxpayer’s jurisdiction.

(For details, refer EY global alert dated 05 December 2017)

CBDT issues instruction for non-recovery of tax demands from start-up companies issuing shares at premium value

Recently, CBDT issued an administrative instruction that provides guidelines with regard to recovery of demand from start-up companies for additions made to their taxable income by the Tax Authority, by rejecting/modifying the valuation reports issued by merchant bankers or an accountant (CA) on issue of shares.

ITL provides for taxation of the premium amount beyond the fair market value (FMV) received by a closely held company (CHC) on issue of shares to residents in India. Such premium amount received would be taxable as income in the hands of the CHC (premium taxation), which can also include “start-up” companies. The Government had earlier, vide a notification, notified that premium taxation under the ITL will not apply when shares are issued to a resident by a qualifying start-up company. However, media reports suggested that the Indian Tax Authority continued to issue notices to several start-up companies after the notification, challenging the valuations of share issue.

The CBDT has now instructed the Tax Authority that if additions have been made after modifying/rejecting the valuation reports submitted by a start-up company, no coercive measures shall be taken to recover the outstanding tax demand. Further, for all such cases that are pending before the First Appellate Authority, necessary administrative steps should be taken for expeditious disposal of appeals, preferably by 31 March 2018.

(For further details, please click here for our alert dated 08 February 2018)

CBDT releases FAQs on the new taxation regime for capital gains on transfer of equity shares and other securities

CBDT has recently issued clarifications23, in the form of FAQs, relating to the “new taxation regime” in respect of gains arising from transfer of equity shares of a company, units of equity-oriented mutual funds and units of business trusts (hereinafter collectively referred to as “specified securities”), as proposed by the Finance Bill, 2018 (FB 2018).

The FB 2018, introduced in the Indian Parliament on 01 February 2018, has proposed a paradigm shift in taxation of specified securities from total exemption, to a concessional rate of taxation where the concessional rate of 10% will be levied on a resident or non-resident taxpayer (including FIIs) earning income in the form of long-term capital gains exceeding INR0.1 million.

The CBDT, in this regard, has issued clarifications in the form of 24 questions and answers on various issues in relation to:

• Scope and applicability of the new taxation regime• Manner of computation of capital gains• Applicability on capital gains income for FIIs• Withholding requirement on transfer of specified

securities• Treatment of losses from transfer of specified securities

(For further details, please click here for our alert dated 05 February 2018)

From the Tax Gatherer’s Desk

23 F. No. 370149/20/2018-TPL dated 04 February 2018

18 Tax Digest

Revised India-China tax treaty to incorporate minimum standards and other changes under the base erosion and profit shifting (BEPS) project

The Indian Government has given its approval for signing and ratifying of a protocol to amend the tax treaty between India and China, 1995, as stated in a press release dated 07 February 2018.

The press release provides that, among others, the following changes shall be carried to the DTAA through the Protocol:

• Updating the existing provisions for exchange of information to the latest international standards

• Changes to incorporate treaty related minimum standards under the BEPS project

• Changes as per BEPS Action reports as agreed to by both the countries

For details, refer EY flash news dated 08 February 2018

Protocol to treaty between Brazil and India enters into force

On 04 January 2018, the Ministry of Finance (MoF) issued a notification stating that the protocol amending the tax treaty between India and Brazil, 1988, entered into force from 06 August 2017.

Treaty Updates

The amending protocol expands the scope of “exchange of information” (EoI) under the India-Brazil tax treaty. For instance, prior to the amending protocol, EoI was possible only in respect of taxes covered by the tax treaty. However, now, EoI is allowed in respect of taxes of every kind and description imposed in India/Brazil. Also, under the amending protocol, it is possible to request information even though the other country may not need such information for its own tax purposes.

Source: Notification No. S.O. 93(E) issued by MoF dated 04 January 2018

India signs tax treaty with Iran

On 17 February 2018, the Indian Government issued a press release stating that India and Iran have signed a tax treaty. The press release states that this tax treaty shall stimulate flow of investment, technology and personnel from India to Iran and vice versa, provide for exchange of information and prevent double taxation. The press release also mentions that the tax treaty meets the minimum standard under BEPS project.

Source: Press release dated 17 February 2018

19 Tax Digest

Happenings across the border

Organisation for Economic Co-operation and Development (OECD) launches International Compliance Assurance Programme (ICAP) pilot

On 23 January 2018, the OECD announced the launch of the ICAP pilot. The pilot is being led by the OECD Forum on Tax Administration (FTA), and focuses on the multilateral risk assessment and resulting tax assurance of large MNE groups.

ICAP is a voluntary program that will use Country-by-Country (CbC) reports and other taxpayer-provided information to allow MNE groups and tax administrations to engage in an open and transparent discussion on tax risks, and, if an agreement can be reached that the issues are low risk, to provide outcome letters that state this. The MNE group will also receive assurance that they will not receive further compliance interventions from the covered tax administrations (covering the period of review, together with the next two succeeding tax years), provided there are no material changes during this period.

There are eight FTA jurisdictions participating in the pilot: Australia, Canada, Italy, Japan, the Netherlands, Spain, the UK and the US. The number of MNE groups participating in this exercise is unknown, and each was invited to participate by the tax authority of the jurisdiction in which it is headquartered. Future ICAP participants will have specific eligibility requirements and an application process for MNE groups to follow.

(For details, refer EY global alert dated 26 January 2018)

OECD releases country approaches to Country-by-Country Reporting (CbCR) Guidance and adds additional questions

On 08 February 2018, the OECD released additional guidance to give greater certainty to tax administrations and multinational enterprise groups on the implementation and operation of BEPS Action 13 CbCR. The existing guidance on the implementation of CbCR has been updated to address two specific issues:

• The definition of total consolidated group revenue, relevant to determine whether a filing obligation exists

• Whether non-compliance with the confidentiality, appropriate use and consistency conditions constitutes a systematic failure, which could trigger an obligation for local filing of the CbC report

Additionally, the OECD released a compilation of the approaches adopted by 24 member jurisdictions of the Inclusive Framework on BEPS with respect to some of the issues where the Guidance allows for alternative approaches.

(For details, refer EY global alert dated 09 February 2018)

Six additional jurisdictions sign the Multilateral Convention (MLI) to implement tax treaty related measures to prevent BEPS

On 24 January 2018, six additional jurisdictions (Barbados, Côte d’Ivoire, Jamaica, Malaysia, Panama and Tunisia) signed the MLI to Implement Tax Treaty Related Measures to BEPS during a second signing ceremony that took place at the OECD Headquarters in Paris. At the time of signature, these six signatories submitted a list of their tax treaties in force that they would like to designate as Covered Tax Agreements (CTAs), i.e., treaties to be amended through the MLI. Now, the total number of countries that have signed the MLI is 78. Further, four other jurisdictions (Algeria, Kazakhstan, Oman and Swaziland) have expressed their intent to sign the MLI in the near future.

Additionally, Poland has also deposited its instrument of ratification, acceptance or approval of the MLI, becoming the fourth jurisdiction to do — after Austria, the Isle of Man and Jersey. The MLI will enter into force on the first day of the month following the expiration of a period of three calendar months beginning on the date of deposit of the fifth instrument of ratification, acceptance or approval.

(For details, refer EY global alert dated 26 January 2018)

20 Tax Digest

High Court, Delhi

Circular restricting interest on delayed refund of SAD struck down

Customs Act, 1962; in favor of assessee

The assessee is a manufacturer, importer and seller of products such as mobile phones. The assessee imported goods and cleared them after paying Special Additional Duty (SAD) under Section 3(5) of the Customs Tariff Act, 1975 (CTA) in addition to basic customs duty and additional customs duty under Section 3(1) of the said Act.

The assessee claimed the refund of SAD paid as provided under Notification No. 102/2007-Customs dated 14 September 2007 issued under the provisions of Section 25(1) of the Customs Act, 1962 (Customs Act). Section 27 of the Customs Act provides periodicity and conditions for granting refund. Further, Section 27A of the said Act provides for payment of interest on delay in granting refund beyond three months. However, Para 4.3 of the Circular 6/2008–Customs provides that in the absence of a specific provision for payment of interest being made under Notification No. 102/2007-Customs, the payment of interest does not arise for SAD refund claims.

The assessee claimed interest on delayed refund under the provisions of Section 27A of the Customs Act. However, the claim was disallowed by the department. The assessee filed a writ petition before the Delhi High Court (HC) challenging Para 4.3 of the Circular and allowing interest on delayed refund of SAD.

The Revenue contended that the provisions of Section 27A of the said Act are not applicable as the notification referred above was issued under Section 25 of the Customs Act. In support of its contention, Revenue relied on the Para 4.3 of Circular No. 6/2008-Customs dated 28 April 2008 which provided for non-payment of interest under Section 27A on delayed refund of SAD.

The assessee relied on the Delhi HC judgment in the case of Principal Commissioner of Customs v. Riso India Pvt. Ltd. (2016 (333) ELT 33} where the HC allowed interest on delayed payment of SAD refund.

Relying on the ruling in the case of Riso India Pvt. Ltd., the HC observed that the term “duty” as used in Section

27(2) of the Customs Act includes SAD. Further, the HC referred the observation of the Delhi HC Court in the above ruling on Para 4.3 of the Circular (supra) that it was not in consonance with the statutory provisions of Section 27A.

The HC also relied on the ruling of the Madras HC in the case of KSJ Metal Impex (P) Ltd. v. Under Secretary (CUS.), M.F. (D.R.) [2013 (294) ELT 211 (Mad.)] wherein the Madras HC observed that the authority cannot override the provisions of Section 27 and Section 27A by a circular and deny the right which was granted by the said provisions. The HC further observed that Para 4.3 of the said circular was contrary to the statute and hence required to be struck down.

Based on the provisions of Section 25, 27 and 27A of the Customs Act and relying on the above-mentioned rulings, the HC struck down Para 4.3 of the Circular and held that interest would be payable under Section 27A of the Customs Act on refund of SAD in terms of Notification No. 102/2007-Customs.

Micromax Informatics Limited v. Union of India and Ors. [2018-VIL-52-DEL-CU]

Tribunal, New Delhi

Consideration for granting distribution rights cannot be treated as royalty and hence cannot be included in the transaction value

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

The assessee is a subsidiary entity of an Italian multinational company (parent company) having global presence and engaged in the manufacturing of eyewear. The parent company has two subsidiaries in India including the assessee, and it entered into an agreement with the other subsidiary (other than the assessee) granting an exclusive license to distribute imported goods supplied by the parent company and also through the other subsidiaries of the parent company located across the globe. The assessee entered into a sub-distribution agreement with the other Indian subsidiary whereby the assessee was appointed as an exclusive distributor for eyewear products, Indian as well as imported. As a consideration for such appointment, the assessee was

Case Laws

Indirect taxCustoms

21 Tax Digest

required to pay trademark license fee at the rate of 2.75% of the net sales of eyewear products at the end of every financial year.

The issue in dispute was whether the payment on account of trademark license fee by the assessee to the other Indian subsidiary, which had also paid such fees to the parent company, would be includible in the transaction value in terms of Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.

The Revenue submitted that the agreement between both the Indian subsidiaries was with the consent of the parent company. Further interpretation of various clauses of the agreement clears the fact that the amount paid by the assessee was a consideration for being granted exclusive distribution rights.

It was further submitted by Revenue that the trademark license fee was based on the sale price of the goods imported and therefore could not be done without payment of royalty. Such royalty is indirectly a condition of sale.

The Revenue relied on various rulings of the Hon’ble Supreme Court (SC) , viz., Ferodo India (P) Ltd. [2008 (224) ELT 23 (SC)], Essar Gujarat Ltd. [1996 (88) ELT 609 (SC)], Living Media India Ltd. [2011 (271) ELT (SC)] and Agro Tech Foods Private Limited [2015 (330) ELT 448 (T- M).

The assessee submitted that the original authority had carefully examined all the documents related to transactions and by applying the provisions of Rule 10(1)(c) of the Valuation Rules held categorically that payment for distribution rights had no relationship to imports.

It was further submitted that the consideration paid was for the appointment as sub-distributor and not toward any fee as royalty.

Also, the assessee relied on the SC ruling in the case of Ferodo India (P) Ltd. (supra).

In addition to the submissions made by both the parties, the Tribunal referred the order passed by the original authority. The Tribunal agreed with the comments passed by the original authority that such inclusion in value is permissible only if all the conditions that can be arrived on

the basis of provision of Rule 10(1)(c) are satisfied.

The Tribunal further agreed with the observation of the original authority that the consideration paid by the assessee was for the distribution rights and not for their imports.

Based on the above observations and the provision of Rule 10(1)(c), the Tribunal upheld the order passed by the original authority and decided the appeal in favor of the assessee.

CC, New Delhi v. Luxottica India Eyewear Private Limited

[2018-VIL-62-CESTAT-DEL-CU]

Tribunal, Bangalore

Duty not payable on goods imported based on the certificate from STPI authorities

The Customs Act, 1962; in favor of assessee

The assessee is a software technology park (STP) unit. The assessee imported goods, viz., firefighting equipment, smoke detectors, micro perforated fire sheets and cafeteria tables, without paying customs duty on the basis of the certificate issued by the STPI authorities as the unit was eligible for duty-free import of various goods in terms of Notification No. 52/2003 – Customs dated 31 March 2003. The goods were stored in a bonded warehouse.

Subsequent to import of goods, the Department was of the view that the goods imported were not covered for duty-free imports under the said notification and demanded duty on such imports.

The assessee submitted that once the import list is approved by the STPI authorities, the Department does not have any right to object on duty-free import of such approved goods. In support of its contention, the assessee relied on the Tribunal decision in the case of Accenture Services Private Limited [2007-TIOL-1881-CESTAT-BANG]. In the said case, a security system was imported after the approval of the STPI authority. On the proceedings initiated by the Revenue demanding customs duty on such imports, the Tribunal expressed that once the goods are imported after approval by the STPI/approval committee, the

22 Tax Digest

Customs authority cannot take a different view. If Revenue is of the opinion that the approval committee is wrong, then they should bring this to the notice of the Ministry of Commerce and CBEC. Thus, the appeal was decided in favor of the assessee.

In the present appeal, the Tribunal expressly commented that there was no dispute to the fact that the goods had been covered by a valid certificate issued by the STPI authorities and also the goods were found in the bonded warehouse. Hence, based on the Tribunal decision in the case of Accenture Services (supra), the Tribunal decided the appeal in favor of the assessee.

Customer Operational Services (Bangalore) Pvt. Ltd. v. Commissioner of Customs and Service tax, Bangalore - Customs [2018-VIL-38-CESTAT-BRL-CU]

Foreign Trade Policy (FTP)

High Court, Delhi

Export obligation period cannot be extended on mere “hardship” plea; current FTP procedures enforceable

Foreign Trade (Development and Regulation) Act, 1992; in favor of Revenue

The assessee had obtained an Advance Authorization for import of 30,000 MT of raw sugar of cost, insurance and freight (CIF) value of INR829,462,500 with the obligation to export 28,751.400 MT of white sugar by 30 April 2014. However, in view of the orders passed by the Allahabad HC in a public interest litigation (PIL) in the case of Kisan Mazdoor Sangathan v. State of Uttar Pradesh and Ors., the stocks of white sugar produced by the assessee were placed under the control of the District Magistrate and the assessee was unable to export it.

The assessee filed an application dated 08 May 2014 with the Directorate General of Foreign Trade (DGFT) seeking extension of time to perform its export obligation. The application was considered favorably and extension up to 07 October 2014 was granted. The assessee then filed applications dated 23 June 2015 and 07 December 2015 for further extension of time with both the Policy Review Committee (PRC) as well as the DGFT respectively.

However, both these applications were rejected. Thus, the assessee has filed the present writ petition impugning the order dated 08 March 2016 passed by the PRC and also the order dated 22 September 2015 passed by the DGFT.

The assessee contended that it faced a genuine difficulty in performing its export obligation on account of the Allahabad HC’s order in the PIL, pursuant to which the Government took control of the stock of white sugar owned by the assesse. While he had filed an application before the District Magistrate for release of sugar for export purposes, it was not entertained.

The assessee also contended that DGFT had grossly erred in considering the assessee’s application in terms of Foreign Trade Policy (FTP) 2015-2020, which was notified on 01 April 2015. He stated that the notification dated 01 May 2015 whereby Appendix 4J of the Handbook of Procedures 2015-2020 was amended to restrict the extension of export obligation to a period to six months in case of raw sugar could not applied retrospectively. He contended that the assessee had a vested right to be considered under the FTP as existing prior to 01 April 2015.

However, the Delhi HC was not inclined to agree. It opined that in terms of the Advanced Authorization, the assessee was to complete its export obligation by 30 April 2014. At the material time, there was no order passed by any court that restricted or prevented the assessee from completing its export obligation. The interim order by virtue of which the arrangement was made for liquidation of a portion of the sugar stocks was passed by the Allahabad HC on 13 August 2014, that is, after the initial period for completing the export obligation had lapsed.

Further, the assessee had not moved any application before the Allahabad HC to seek variation of the interim order to permit the assessee to perform its export obligations. The Delhi HC also remarked that the Allahabad HC had passed the said order as the amount payable to sugarcane growers for purchase of sugarcane had not been discharged. The Delhi HC found it difficult to accept that the Allahabad HC would have interdicted the assessee from exporting its sugar as it was only concerned with ensuring that the sale proceeds were utilized to discharge the dues of banks and sugarcane growers.

23 Tax Digest

The Allahabad HC finally disposed of the PIL on 05 September 2014, approximately one month prior to the expiry of the extended export obligation period. The assessee has no reasonable explanation why it could not complete the export during this period considering that it was the assessee’s case that it had confirmed export orders in hand.

The HC opined the contention that the assessee’s application dated 23 June 2015 was required to be considered as per the provisions of the FTP as in force prior to 01 April 2015 is also unmerited. The assessee has no vested right for grant of extension of the export obligation period and thus its application for extension would necessarily have to be considered as per the policy in force. Undisputedly, as per the policy applicable on 23 June 2015, an extension for the purpose of discharging the export obligation in respect of import of raw sugar could not be granted beyond a period of six months. Thus, even if it is assumed for the sake of argument that the assessee had made out a genuine case of hardship, no extension beyond a period of six months for completion of the export obligation could be granted.

Thus, in view of the above, the Delhi HC dismissed the writ petition.

Simbhaoli Sugars Ltd. and Anr. v. Union of India and Ors. [2017-TIOL-2622-HC-DEL-CUS]

High Court, Delhi

TED refund granted on goods supplied to EOUs; deemed export provisions are unambiguous

Foreign Trade (Development and Regulation) Act, 1992; in favor of assessee

The assessee is a manufacturer of motor vehicle parts, located in a Domestic Tariff Area (DTA). The assessee claims that during the period January 2012 to April 2013, it cleared excisable goods, on payment of excise duty, to two 100% EOUs. The assessee filed a claim for refund of the Terminal Excise Duty (TED) on account of the said goods cleared to EOUs. However, the said refund claim was rejected by the Joint Director General of Foreign Trade on 05 June 2013 with the endorsement that “as supply is made to 100% EOU, TED is not admissible in terms of policy circular dated 15 March 2013.” Policy Circular No.

16 (RE-2012)/2009-14 dated 15 March 2013 clarifies that no refund of TED should be provided in cases where supplies of goods are ab initio exempted from excise duty.

Against this rejection of refund of TED, the assessee filed the present writ petition. It contended that it is entitled to refund of TED on the supplies made to 100% EOUs as in terms of paragraph 8.2 (b) of the FTP 2009-2014, the supply of goods to EOUs would qualify as “deemed exports” and thus in terms of Paragraph 8.3(c) read with Paragraph 8.5 of the FTP 2009-14, they were eligible for refund of TED.

The Revenue disputed this claim as according to the Revenue, the supplies made by the assessee were exempt from payment of excise duty and refund of TED under the FTP is available only in respect of those supplies that are otherwise exigible to excise duty. The Revenue further claimed that the assessee had paid the excise duty by utilizing CENVAT Credit and the procedure adopted by the assessee to first utilize CENVAT Credit for payment of excise duty and then seeking a refund of the same amounts to circumventing the CENVAT Credit Rules, 2004 (CCR) and the FTP 2009-2014.

The HC rejected the Revenue’s stand that such supplies being exempt from excise duty, no refund of TED shall be available in terms of Paras 8.2(b), 8.3 and 8.5 of FTP as amended with effect from 18 April 2013 vide Notification No. 4 (RE-2013)/2009-14. It held that the said amendment was substantive and could not be termed “clarificatory” in view of the unambiguous plain language of Para 8.3 of the FTP 2009-2014. The HC relied on the SC decision in DGFT v. Kanak Exports [(2016) 2 SCC 226] to observe that the Central Government could not be make substantive changes to the FTP that had the effect of taking away any vested right to claim refund of excise duty in respect of “deemed exports.” Accordingly, the HC set aside Policy Circular No. 16 (RE-2012)/2009-14 dated 15 March 2013 holding that it was beyond the powers of the DGFT.

The HC also held that it did not find merit in the Revenue’s contention that the assessee had sought to circumvent provisions of CCR. It observed that the fact that the CCR Rules do not mention “deemed exports” would not be relevant considering that Paragraph 8.3(c) of the FTP expressly provided for refund of TED in cases of deemed exports.

Deepak Enterprises. v. Union of India and Ors. [2018-TIOL-

199-HC-DEL-CUS]

24 Tax Digest

Central excise

High Court, Allahabad

In absence of evidence for clandestine removal, levy of penalty is unsustainable

Central Excise Act, 1944; in favor of assessee

The assessee is engaged in the manufacture of permanent D.C. starter motor used for two-wheeled and three-wheeled motor vehicles manufactured by Bajaj Auto Ltd. A team of preventive officers of the Central Excise Division –IV visited the assessee’s factory premises and on physical verification of the stocks of finished goods and inputs with books of accounts, it was observed that the stock was less than the actual production shown in the production slips. Further, on scrutiny of the RG-1 registers, cash book and balance sheet, miscellaneous income of INR26.98 lakh was found. When the Revenue asked for an explanation for said income, the assessee could not explain its source. Therefore, it was alleged that the assessee unit appeared to be engaged in clandestine manufacturing and was clearing goods clandestinely to independent dealers in the local market. The words “local market” were written against production shown in certain production slips to indicate that the said production was not to be recorded in excise records and was to be sold without payment of duty.

A show cause notice (SCN) was issued to the assessee imposing penalty under Section 11AC of Central Excise Act, 1944 and penalty of INR1 lakh on the managers under Rule 26 of the Central Excise Rules, 2002. Being aggrieved, the assessee filed an appeal before Commissioner (Appeals), who dismissed the appeal. The assessee preferred an appeal before the Tribunal.

Upon examining the matter, the Tribunal recorded a clear finding of the fact that the Revenue had failed to establish the case of clandestine removal. The Revenue had only produced a rough work progress register, which was admittedly not a statutory register, and had also failed to produce any cogent. The Tribunal agreed that the contentions of the Revenue of clandestine removal were serious allegations and required to be established beyond doubt by production of sufficient and positive evidence. The doubts, however strong, cannot be converted into

evidence so as to confirm the demand. The Tribunal categorically recorded that the Revenue failed to establish its allegation and charges made against the assessee for clandestine removal. The Tribunal referred the judgement relied upon by the assessee in the case of Continental Cement Company v. Union of India [2014-TIOL-1527-HC-ALL-CX] wherein it was stated that unless there is clinching evidence of the nature of purchase of raw materials used in the manufacture of the final product, clandestine removal cannot be presumed against the manufacturer. Clandestine removal is a serious charge and the burden is upon the Revenue to establish such a charge on the basis of cogent and real evidence. The Tribunal stated that Revenue in the present case had neither been able to discharge the burden of proof by way of any real evidence of any kind of clandestine removal nor even made an attempt to make search and investigation in the matter.

In this regard, the Tribunal was of the opinion that there was no case of clandestine removal. In view of the above, the HC upheld the Tribunal’s decision and answered in favor of the assessee.

Commissioner of Customs, Central Excise and Service tax, Ghaziabad v. Auto Gollon Industries Pvt. Ltd., [2018-TIOL-111-ALL-CX]

Tribunal, New Delhi

Undertaking manufacture making use of technical know-how and specifications of goods as supplied by customer held to be job work; valuation to be done as per Rule 10A

Rule 10A of Central Excise Valuation Rules, 2000; in favor of Revenue

The assessee is engaged in the manufacture of ready-to-drink ice tea under brand names “Tealite Lemon” and “Tealite Apple.” During the course of audit of the assessee for the period April 2010 to May 2011, it was noticed that the goods were manufactured by the assessee as per an agreement entered into with Zydus Wellness Ltd. Based on the terms of the agreement, the assessee was required to undertake manufacturing activity by making use of the technical knowhow and specifications of the goods supplied by Zydus. Further, as per the agreement, the raw materials were to be procured by the assessee only

25 Tax Digest

from the suppliers identified by Zydus. The sale price of the goods were agreed upon between the two parties and specified in the agreement.

The goods were cleared by the assessee to Zydus on payment of excise duty on the transaction value. As per Revenue, the inputs manufactured by the assessee were on a job work basis and hence the valuation of the goods for charging excise duty was to be done as per Rule 10A of the Central Excise (Determination of Price of Excisable Goods) Rules, 2000. The assessee submitted that the goods were manufactured as per the terms of the agreement. The assessee was neither a job-worker nor manufacturing the goods on behalf of Zydus. Therefore, Rule 10A of the Valuation Rules was not applicable in the given case. The transaction with Zydus was on a principal-to-principal basis and the goods were sold on the basis of the price agreed between the two parties. Further, the assessee contended that in terms of Section 4(1)(a) of the Central Excise Act, 1944, since the price is the sole consideration and the relationship between both parties is at arm’s length, the transaction value should be accepted. The assessee also relied on various rulings and particularly on the ruling of Shivani Detergent Pvt. Ltd. [2016-VIL-1052-CESTAT-DEL-CE].

The Tribunal observed that in terms of the agreement, it was evident that the assessee was required to manufacture the goods exclusively for Zydus, and using their specifications as an agent of Zydus, and using the technical knowhow relating to the product that will be supplied by Zydus. Also, it was evident from the clause of the agreement that the goods were to be manufactured from inputs supplied by the suppliers identified by Zydus. Further, perusal of the various clauses of the agreement read together leads to the conclusion that the goods have been manufactured by the assessee as a job worker on behalf of Zydus.

The above conclusion is further reinforced by the fact that in a case of a principal-to-principal transaction, the goods are to be priced including all the elements of cost involved in the manufacture and sale of goods. In the present case, from the price agreed upon between the two parties, it is obvious that various elements of cost that clearly are required to be included in the selling price of manufactured product have not been included. In the present case, for

example, the goods were to be manufactured using the technology, standard and technical knowhow relating to the product which will be supplied by Zydus. But such elements of cost have escaped the agreed price between the assessee and Zydus.

Once it is concluded that the assessee has acted as a job worker for Zydus, Rule 10A of the Valuation Rules becomes applicable and the goods are required to be valued on the basis of the price at which the principal manufacture, Zydus, sells such goods from their depot.

In this regard, the impugned order was sustained and the appeal was dismissed.

Hershey India Pvt. Ltd. v. CCE and ST, Bhopal [2018-VIL-63-CESTAT-DEL-CE]

Tribunal, Chennai

Denial of excise duty exemption on goods supplied for UN projects is unjustifiable

Central Excise Act, 1944; in favor of assessee

The assessee made supplies to projects financed by the World Bank, Asian Development Bank or International Organization approved by the Government of India, availing exemption from excise duty under Notification No. 108/1995 –CE dated 28 August 1995. SCNs were issued alleging that the benefit of the notification was not available to the assessee on the following grounds:

• The specified goods were cleared to the contractors of the project instead of the project authorities.

• The exemption would be applicable only for such goods that become part of the project on a permanent basis and not for those that are used by the contractors for execution of the project, who after completion of the project will remain to be owners of the said goods and would put the said goods for further deployment in other projects.

The assessee submitted that the issue of whether the benefit of the exemption is available when the goods are supplied to the contractor in charge of the execution of the project financed by the World Bank stands settled in favor of the assessee by referring various judicial precedents such as IBM India Pvt. Ltd. v. CCE – 2008(223) ELT 429

26 Tax Digest

(Tri.-Chen.) affirmed by the Honorable Madras HC in CCE v. CESTAT – 2016 (335) 211 (Mad.); Sunbeam Generators Pvt. Ltd. CCE –2015-TIOL-1146-CESTAT-MAD.

In relation to the second issue, the assessee contended that Explanation 2 inserted w.e.f. 01 March 2018 seeks to deny the exemption benefit only when goods are withdrawn during the tenure of the project and not otherwise. The assessee contended that the Revenue had interpreted this explanation to extend the word “withdrawal” even after the completion of the project. This interpretation was erroneous. The Revenue had incorrectly interpreted the word “withdraw” to refer to the time period even after the completion of the project.

After hearing both the parties, in relation to the first issue the Tribunal relied on the judgement of the HC in case of CCE, Pondicherry v. Caterpillar India Pvt. Ltd. (2016-VIL-176-MAD-CE) wherein it was held that the use of the phrase “supply to the projects financed by United Nations or International Organisation and approved by the Government of India” clearly shows that the condition for grant of exemption is supply toward the project. Since the conditions are satisfied, the benefit of exemption cannot be denied stating that the goods were supplied to the contractor. The Apex Court had affirmed the said decision. A similar view was taken by the jurisdictional HC and the Tribunal in the decisions relied by the assessee and cited supra. Following the same, the tribunal was of the view that the denial of exemption benefit on the ground that the goods were cleared to contractors cannot sustain.

With regard to the second issue, the tribunal observed that to compel the contractor that the capital goods used in the project cannot be withdrawn even after completion of the project would be highly impractical and impossible. The law does not compel a man to do that which he cannot possibly perform. The Higher Courts have held that exemption is available even if such goods are supplied to the contractor and that supply to the contractor would mean supply to the project authority as stated in the Notification. The Revenue cannot then interpret the explanation inserted in the Notification to restrict the exemption only to goods that form part of the project on a permanent basis.

It was further observed that assessee had complied with the condition of furnishing certificate of designated authorities. The Revenue allowed clearance of the goods

without any murmur on the validity of the certificate. Later, the Revenue could not turn around to deny exemption by interpreting Explanation 2 to the effect that the exemption is not available if the goods are withdrawn from project site.

Thus, the tribunal held that denial of excise duty exemption on goods supplied for UN projects was unjustified.

Schwing Stetter (I) Pvt. Ltd. v. CCE and ST. LTU, Chennai [2018-VIL-68-CESTAT-CHE-CE]

CENVAT credit

Supreme Court

CENVAT credit on outward transportation from place of removal is eligible prior to 01 April 2008

CENVAT Credit Rules, 2004; in favor of assessee

The assessee is a manufacturer of sugar, molasses and various inorganic chemicals. It was availing credit on inputs, capital goods and input services and utilizing it for the payment of excise duty. It came to the notice of the Revenue that during December 2007, the assessee had taken credit of Service tax paid on transportation charges up to the place of customers, which according to the Revenue is inadmissible.

The Revenue issued an SCN demanding the CENVAT credit availed during the above mentioned period along with interest and proposed to impose penalty; thereafter, an order-in-original was passed.

The assessee filed appeal before the Commissioner (Appeals). The Commissioner (Appeals) allowed the appeal by setting aside Order-in-Original. The Revenue filed appeal before CESTAT against the Commissioner (Appeals)’s order. The CESTAT dismissed the appeal. The Revenue then filed an appeal before the HC, which was also dismissed.

Aggrieved, the Revenue filed an appeal before SC.

The SC noted that as per the definition of “input service” prior to 01 April 2006, the service used by the manufacturer of clearance of final products “from the place of removal” to the warehouse or customer’s place etc., was exigible for CENVAT credit.

27 Tax Digest

The SC also observed that the matter was squarely covered by Circular No. 97/8/2007-ST dated 23 August 2007 issued by the Central Board of Excise and Customs (CBEC), which clarifies the definition of “input service” and provides the conditions that are to be satisfied to cover the case within “place of removal.”

Therefore, the SC dismissed the appeal filed by the Revenue as it was devoid of any merit.

CCE Guntur v. The Andhra Sugars Ltd. [2018-TIOL-45-SC-

EX]

Tribunal, Mumbai

CENVAT credit not required to be reversed if the shortage in stock is within tolerance limit

CENVAT Credit Rules, 2004; in favor of assessee

A demand was raised on the assessee for wrongful availment of CENVAT credit on inputs that were found to be short during the period from April 2004 to March 2007 during physical stock taking and based on the cost audit report.

The first appellate authority dropped the demand. The Revenue preferred an appeal against the said order before the tribunal.

The assessee relied upon the decision of Punjab and Haryana HC in the case of Maruti Udyog Limited [2010 (62) ELT 180 P&H] wherein it was held that as the CENVAT/Modvat on the input shortage of 0.24% of the total input received is within the tolerance limit fixed by the management and certified to be within norms by qualified professionals, it would be unreasonable and unfair for the tax authorities to take a different view. Further, as there is no evidence of illegal/diversion of inputs, credit is not deniable.

The Revenue contended that the assessee was entitled to avail CENVAT credit only to the extent that the inputs were actually utilized in the manufacture and that the burden of establishing legitimate use devolves on the assessee by proper accounting. The Revenue relied on various case laws wherein it was held that non-existence of inputs is sufficient ground for denial. The Revenue also contended

that the decision of the tribunal in the case of Maruti Udyog Limited [2004 (173) ELT 382 (CESTAT)], on which the first appellate authority placed reliance, had been overruled by Bombay HC in the case of Greaves Cotton Ltd. [2007-TIOL-445-HC-MUM-CX].

The Tribunal referred to the finding of the first appellate authority wherein the authority observed that in the present case, the shortages account for only 0.07% to 0.16% in case of engine division and 0.02% to 0.06% in case of bearing division. When compared to the nature of manufacturing activities carried out by the assessee, the shortage in the present case is a minor fraction of the total consumption of raw materials and the case is covered by the Maruti Udyog Limited judgment.

The Tribunal also stated that in view of lack of any evidence of clandestine removal and the reasonableness of the explanation for the shortage found to be within normal tolerance limit, it appears that citing of the allegedly discredited decision of the Tribunal in re Maruti Udyog Limited was not the sole determinant.

The Tribunal also noticed that the grounds of appeal fail to specify any part of the SCN that can controvert the claim of process loss that is inherent in any manufacturing activity. Further, the proceedings also do not shed light on the manner in which a physical verification of inventory on one occasion can explain shortages over a period of time.

Thus, the Tribunal, while holding that there was no merit in the appeal filed by the Revenue, dismissed the appeal.

CCE Pune v. Kirloskar Oil Engine Ltd. [2017-TIOL-4522-CESTAT-MUM]

28 Tax Digest

Service tax

Supreme Court

Value of free of cost supplies not includible in gross amount charged for levying Service tax

Finance Act, 1994; in favor of assessee

The assessees are engaged in the business of construction and provide “commercial or industrial construction service.” The assessees were discharging Service tax after availing benefit under Notification No. 15/2004–ST dated 10 September, 2004, which provides that Service tax has to be calculated on the value that is equivalent to 33% of the gross amount charged to the recipient by the service provider for providing the taxable service.

The Notification was amended vide another Notification No. 4/2005-ST dated 01 March 2005 whereby an explanation was added to the original Notification that the “gross amount charged” shall include the value of goods and materials supplied or provided or used by the provider of construction services for providing such service.

It was optional for the assessees to avail the benefit under the Notification No. 15/2004-ST.

The assessees availed the benefit and discharged the Service tax on 33% of the gross amount charged from the service recipients. The assessees also received some of the goods/materials free of cost from the service recipient. The Department included the value of such free of cost goods/materials in the gross amount charged and levied Service tax on 33% of such gross amount charged.

The different benches of the Appellate Tribunal had conflicting views in the aforesaid question and therefore the matter in all such appeals was referred to the Larger Bench (LB) of the Tribunal, New Delhi, as a batch of matters. The LB decided the issue in favor of the assessees by holding that the value of the free of cost goods/materials provided by the service recipient cannot be added for the purpose of Notification No. 15/2004-ST.

The Revenue preferred the appeal against the LB’s order before the SC.

The Revenue submitted that Explanation (c) to Section 67 of Chapter V of the Finance Act, 1994 (the Act) provides that payment received in “any form” and “any amount credited or debited, as the case may be ...” is to be included for the purposes of arriving at the gross amount charged. The value of goods/materials supplied free is a form of payment and therefore should be added.

In case the assessees did not want to include the value of goods/materials supplied free of cost by the service recipient, they were not entitled to the benefit of Notification No. 15/2004-ST.

While deciding the appeal, the SC observed that the value as per Section 67 of the Act on which Service tax is payable has to satisfy the following ingredients:

The definition of “gross amount charged” given in Explanation (c) to Section 67 only provides for the modes of the payment or book adjustments by which the consideration can be discharged by the service recipient to the service provider. It does not expand the meaning of the term “gross amount charged” to enable the Department to ignore the contract value or the amount actually charged by the service provider to the service recipient for the service rendered and add the value of goods supplied free of cost over and above the contract value to arrive at the value of taxable services.

The amount should be for “such service provided” — It is not any amount charged which can become the basis of value on which Service tax becomes payable but the amount charged has to be necessarily a consideration for the service provided, which is taxable under the Act. The free-of-cost goods provided by the service recipient to the service provider cannot be regarded as a consideration for the service provided by the service provider.

Explanation 3 to Section 67(1) clarifies that the gross amount charged for the taxable service shall include the amount received toward the taxable service before, during or after provision of such service, implying thereby that where no amount is charged, it should not be included.

Though Section 67(4) of the Act states that the value shall be determined in such manner as may be prescribed, it is subject to the provisions of Sub-sections (1), (2) and (3).

29 Tax Digest

Moreover, no such manner is prescribed which includes the value of free goods/material supplied by the service recipient for determination of the gross value.

Further, the SC referred its own decision in the case of Larsen & Toubro Ltd. [(2016) 1 SCC 170], wherein it was held that if the levy itself of Service tax has been found to be non-existent, no question of any exemption would arise.

The Service tax is to be levied in respect of “taxable services,” and for the purpose of arriving at 33% of the gross amount charged, unless the value of some goods/materials is specifically included by the Legislature, it cannot be added.

The SC further stated that the aforesaid exemption notifications have been issued under Section 93 of the Act. The exemption under Section 93 can only be granted to those activities in respect of which the Parliament is competent to levy Service tax.

Thus, the SC upheld the view taken by the LB of CESTAT, New Delhi.

Commissioner of Service tax Etc. v. Bhayana Builders (Pvt.) Ltd. [TS-47-SC-2018-ST]

High Court, Delhi

HC rejects utilization of accumulated credit of Education Cess and Secondary and Higher Education Cess for the payment of Service tax

Finance Act, 1994; in favor of Revenue

Under CENVAT Credit Rules, 2004 (CCR), credit of the Education Cess and Secondary and Higher Education Cess (collectively referred to as Cess) could be availed and utilized for payment of the Cess only and could not be used against the payment of Service tax or excise duty liability.

The writ petition before the Delhi HC sought to quash Notification No. 22/2015- CE (NT) dated 29 October 2015 as violative of Articles 14, 19(1) (g), 265 and 300A of the Constitution of India.

The Court’s direction was also sought for allowing the credit accumulated on account of the Cess to be utilized for the payment of Service tax on telecommunication services.

The assessees contended that the Cess had been ”subsumed” and included in Service tax and excise duty, and therefore the accumulated credit of the Cess on 01 June 2015 for taxable services and on 01 March 2015 for excisable goods should be available for payment of Service tax and excise duty.

Placing reliance on the Finance Minister’s budget speech and Service tax explanatory memorandum to the Finance Bill, 2015, it could be said that this was not a case of abolition of Cess but they were “subsumed,” i.e., added and became part of Service tax and excise duty.

Not allowing such utilization of the Cess would tantamount to lapsing of credit on procurement though higher Service tax or excise duty was payable on the output.

Reference was made to Notification No. 22/2015- CE (NT) dated 29 October 2015 whereby subsequent amendments were made to CCR to partially permit the cross-utilization of the Cess in certain cases.

The assessees relied on the SC decision in Eicher Motors Ltd. and Anr. v. Union of India and Ors. [(1999) 2 SCC 361], and Samtel India Ltd. v. Commissioner of Central Excise, Jaipur [(2003) 11 SCC 324] wherein it was held that a right accrued to an assessee on the date when it paid the tax on the raw materials or the inputs would continue until the facility available thereto gets worked out or until those goods existed.

The Revenue asserted that the effect of the legislation withdrawing the Cess was to abolish them, though while presenting the Bill, etc. and giving reasons for increase in the Service tax and excise duty, it was stated that the Cess would not be henceforth levied and would get subsumed in the higher rate of tax. The credit of Cess toward the payment of Service tax or excise duty is not a vested right. Cross-utilization of the Cess credit was never permitted and allowed under the earlier provisions.

The subsequent amendments to CCR allowing partial cross-utilization of credit of the Cess have a very limited application as they apply to specific cases. The amendment granted new benefits and concessions, as cross-utilization was earlier not permitted nor allowed. Any new concession

30 Tax Digest

or benefit given would not confer a legal right to claim a vested right to a concession or benefit that has not been granted.

Referring to the Finance Minister’s speech and the explanatory memorandum to the Finance Bill, 2015, the HC stated that no statement or assertion was made that the benefit of unutilized Cess credit would be available against Service tax and excise duty and the use of the word “subsumed” could indicate that there would not be an increased tax burden on taxpayers on account of Cess withdrawal.

The use of the word “subsumed” with reference to the Cess could well indicate that there would not be an increased tax burden being put on the payers or the consumers, as the Cess were being withdrawn. Noticeably, the Cess and the Service tax and excise duty were always treated as different and separate and cross-utilization was never permitted.

Omission of a provision signifies deletion of that provision and is normally not treated as different from repeal. The repeal/omission in the present case was not made retrospectively but applied prospectively.

Manufacturers and service providers were entitled to take benefit of Cess credit on the Cess payable on manufactured goods and output services on or before the cut-off date, i.e., 01 March 2015 in case of manufactured goods and 01 June 2015 in case of taxable services. They were not allowed to take credit after the said two dates for the simple reason that the Cess ceased to be applicable and were no longer payable after the said dates.

The subsequent amendments to CCR permitting partial cross-utilization of the Cess against the payment of Service tax and excise duty are really in the nature of concessions confined to a limited and narrow set of cases and are not of general application. These cases certainly fall in a distinct and separate class. Thus, the said classification would not be discriminatory and Article 14 of the Constitution is not violated.

In the present case, while the Cess were in the nature of taxes and not a fee, it would be incorrect and improper to treat the Cess as Service tax or excise duty. They were specific levies for the objective and purpose specified.

The Delhi HC distinguished the decisions in the case of Eicher Motors Ltd. (supra) and Samtel India Ltd. (supra) on facts and held them to be inapplicable in the present situation.

Further, the HC held that the credit of Cess could be only allowed to be utilized against the Cess and could not be cross-utilized against Service tax or excise duty. What is sought is an amendment of the scheme to allow cross-utilization of the unutilized Cess upon them being withdrawn, against Service tax and excise duty, though this was not the position even earlier.

The HC relied upon the decision in Osran Surya (P) Ltd. v. Commissioner of Central Excise, Indore [2002 (1420 ELT 5 (SC)].

As the Cess were withdrawn, abolished and ceased to be payable, it is not possible to accept the contention that a vested right or claim existed and the legal issue is covered by the decision in case of Eicher Motors Ltd. (supra) and in the case of Samtel India Ltd. (supra).

Thus, the HC did not find merit in the writ petition and dismissed it.

Cellular Operators Association of India and Others v. Union of India and Another [TS-44HC-2018 (DEL)-EXC]

Tribunal, New Delhi

In case prices are statutorily regulated, tax payment is on provisional basis and gets finalized only when the debit/ credit note is issued

Finance Act, 1994; in favor of assessee

The assessee is procuring natural gas to be used as fuel in the manufacture of fertilizers in its factory. It gets gas from Gas Authority of India Ltd. (GAIL), Indian Oil Corporation (IOCL) and Bharat Petroleum Corporation Limited (BPCL) through pipelines, which are owned by GAIL. The assessee paid Service tax to M/s. GAIL, which, in turn, remitted the tax to the Government. The rates for transportation of gas through pipelines were provisionally determined by the Petroleum and Natural Gas Regulatory Board (PNGRB) and the provisional prices were finalized by the said authority later.

31 Tax Digest

In the present case, the rates finalized by the board were lesser than the amount that was provisionally charged earlier. Therefore, GAIL/IOCL/BPCL issued credit notes for the excess amount charged toward the transportation of gas through pipelines.

The assessee filed refund claim within one year as it had borne the Service tax on such transportation of gas. The claims were rejected by the lower authorities.

The assessee contended that there is no question of undue enrichment as they are involved in the manufacture of fertilizers, which are sold on controlled prices per the Government’s orders. Further, the assessee has shown the refund amount due as “refund due from the Government” in their accounts. It has also submitted a certificate from a Chartered Accountant that the tax burden has not been passed on to anybody else. The assessee also relied on the case of Chambal Fertilizers and Chemical Ltd. [2017 –TIOL-407- CESTAT-DELHI] and DCM Shriram Consolidated Ltd. [Final Order No.52049/2017 dated 17 February 2017].

The Revenue contended that that the claims were barred by limitation as the provisions of Section 11B of the Central Excise Act, 1944 are clear in this regard. There is no provisional assessment for Service tax payment by the service provider.

The Tribunal noted that the tariff is managed by the statutory authority as per law passed by the Parliament. In such situation, it is apparent that the Service tax payment is on a provisional value. The Tribunal relied on the judgments referred by the assessee wherein it was held that for the purpose of computing the time limit under Section 11B, the date of issue of credit notes is relevant and then only does the provisional price get finalized.

Further, the Tribunal stated that the unjust enrichment principal will not applicable in this case as the assessee’s accounts as well as supporting certificate by the Chartered Accountant are to the effect that this amount is shown as receivables from the Government and not passed on to any other person.

Thus, the Tribunal set aside the impugned order and remanded the matter to the Original Authority for a fresh decision keeping in view the above observations.

National Fertilizers v. CCE Indore [2017-TIOL-4266-

CESTAT-DEL]

Tribunal, New Delhi

Service recipient outside India and receipt of convertible foreign exchange constitute exports

Finance Act, 1994; in favor of assessee

The assessee is engaged in the banking and financial business. It also issues credit cards to its customers. In pursuance of an agreements with VISA International Services Association, USA, and Master Card International, USA, the assessee was authorized to use the brand name of VISA/Master Card in its credit cards. The agreements stipulated various obligations on the part of the assessee, which included the promotion of the brand and business of VISA and Master Card. For such promotion activities, the assessee received consideration from the other parties to the agreement.

The Revenue entertained a view that such promotional activities are liable to Service tax and accordingly, proceedings were initiated against the assessee to demand and recover Service tax under business auxiliary service (BAS).

The assessee submitted that these services were to the benefit and consumption of these parties to the agreement who are located outside India. Accordingly, in terms of Export of Service Rules, 2005, BAS is covered under category III of Rule 3 of Services and in the present case the activities are with reference to export of service. The considerations were also received in convertible foreign exchange. The assessee further relied on the decision of the Delhi HC in the case of Verizon Communication India Pvt. Ltd. [2017-TIOL-1863-HC-DEL-ST].

The Revenue contended that in one of the agreements, the reference of local address of VISA office in India has been mentioned for communication and the dispute, if any, has to be resolved by a court in India only. Further, the assessee is engaged in an activity of promotion in India and the services are rendered in India.

The Tribunal referred to the Verizon case, on which the assessee had relied, wherein it was held that if the payment for the service is received in convertible foreign exchange and the recipient of the service is located outside India, it will be considered as export of service.

32 Tax Digest

The Tribunal observed that the other parties to the agreement with the assessee, who are located outside India, have received the services. As Service tax is a destination-based consumption tax, the present case will cover the requirements for export of services.

Thus, the Tribunal set aside the order and held that the services provided by the assessee to the entity located outside India will be treated as export of service.

SBI Cards and Payment Services Pvt. Ltd. v. Commissioner of Service tax, Delhi [2018-TIOL-326-CESTAT-DEL]

Tribunal, Allahabad

No demand can be sustained unless it is based on a proposal in the show cause notice

Finance Act, 1994; in favor of assessee

The assessee is a telegraph operator, engaged in providing telecommunication services to its subscribers. The assessee availed CENVAT credit on inputs, input services and capital goods and utilized it for discharging its liability of Service tax on output services.

An SCN was issued alleging that the assessee was providing both taxable and non-taxable service and was thus required to maintain separate accounts in respect of input services and CENVAT credit on such input services in terms of Rule 6(2) of the CENVAT Credit Rules, 2004 in respect of taxable and non-taxable output services, failing which the assessee could have utilized CENVAT credit for discharging its liability only up to 20% of the amount of Service tax payable on taxable output service in terms of Rule 6(3)(c) of the Rules and as the said restriction was not adhered to by the assessee, excess utilization of the credit became inadmissible.

The assessee submitted its reply contending that the restriction in Rule 6(3) of CCR is not applicable in respect of credit taken on input services specified under Rule 6(5) of CCR as well as CENVAT credit taken on capital goods.

The Adjudicating Authority accepted the submission of the assessee. However, the Ld. Commissioner held in the order-in-original that the credit amounting to

INR76,318,307 availed on capital goods was not admissible. Therefore, such credit was disallowed and demand was confirmed for it along with penalty.

The assessee contended that the impugned order went beyond the scope of the SCN as there was no allegation and proposal in the SCN to deny any credit availed on items treated as capital goods. Such impugned order was thus in violation of the principles of natural justice also. The assessee placed on reliance on the Apex Court judgments in the case of Toyo Engineering India Ltd. [2006-TIOL-111-SC-CUS] and Sun Pharmaceutical Industries Ltd. [2016-TIOL-10-SC-CX].

The Revenue supported the impugned order-in-original.

The Tribunal noticed that the impugned order, while disallowing the credit on capital goods, traveled beyond scope of the SCN. It is a settled principle of law that no demand can be sustained unless it is based on a proposal in the SCN. The Tribunal relied on the SC judgment in the case of Ballarpur Industries Ltd. [2007-TIOL-153-SC-CX] wherein it was held that SCN is the foundation in the matter of demand and recovery of duty, penalty and interest.

Thus, the Tribunal, while holding that once an SCN does not propose to deny any CENVAT Credit availed on items treated as capital goods it could not have been taken up and adjudicated in the impugned order, set aside the impugned order and allowed the appeal.

Vodafone Mobile Services Ltd. v. CCE and ST, Lucknow [2017 (12) TMI 1275]

Value Added Tax / Central Sales tax

Supreme Court

Post-sale discounts - deductible from taxable turnover

Karnataka Value Added Tax Act, 2003; in favor of assessee

The assessee is engaged in manufacturing home appliances such as mixer grinders, wet grinders and gas stoves. It offers a quantity discount to its distributors

33 Tax Digest

depending on their performance during the previous quarter. It claims the discount as a deduction from the total turnover while arriving at the taxable turnover under the Karnataka Value Added Tax Act, 2003 (the Act). The quantity discount was disallowed by the Revenue on the ground that the discount was not relatable to the sales effected by the relevant tax invoices. Although the Appellate Authority allowed such trade discount, the order was revised by the Additional Commissioner on the ground that the quarterly discount given by the assessee was in respect of the performance of the previous quarter and not in respect of the sales offered under the same invoices. The assessee’s appeal before the HC was dismissed.

The SC noted that every dealer was liable to pay VAT on their taxable turnover. The term “turnover” has been defined to mean the aggregate amount for which goods are sold, distributed, delivered or otherwise disposed of. The taxable turnover is computed after making such deductions from the total turnover and in such manner as prescribed. As per Rule 3(2)(c) of the Karnataka Value Added Tax Rules, 2005, all amounts allowed as discount were allowed as deduction from total turnover provided that such discount was in accordance with the regular practice of the dealer or was in accordance with the terms of any contract or agreement entered into in a particular case and the tax invoice or bill of sale issued in respect of the sales relating to such discount shows the amount allowed as discount.

The SC observed that the words “in respect of the sales relating to such discount” cannot be construed to mean that the discount would be inadmissible as a deduction unless the tax invoice pertaining to the goods originally issued shows the discount. This was a matter of ascertainment. The assessee must establish from its accounts that the discount relates specifically to the sales with reference to which it is allowed. In the first part of the proviso, Rule 3(2)(c) recognizes trade practice or, as the case may be, the contract or agreement of the dealer. The latter part, which provides a methodology for ascertainment, does not override the earlier part. Both must be construed together. Above all, it must be remembered that taxable turnover is turnover net of deductions. All trade discounts are allowable as permissible deductions.

Reliance was also placed on an earlier decision of the SC in the case of Southern Motors v. State of Karnataka [(2017) 3 SCC 467] where it was held that a trade discount ought not to be disallowed merely on the ground that it is not payable at the time of each invoice or deducted from the invoice price.

The SC thus directed that in computing the taxable turnover for the relevant years, the assessee would be entitled to a deduction of the trade discount.

Maya Appliances (P) Limited v. Additional Commissioner of Commercial Taxes and others; [2018-VIL-05-SC]

High Court, Gujarat

Manufacturing pipes using steel plates for use in pipeline laying contract constitutes sale

Gujarat Sales Tax Act, 1969; in favor of Revenue

The assessee is engaged in the business of turnkey engineering, procurement and construction projects. The said business includes, among other activities, the activity of laying pipelines, inter alia, for supply of water. The dispute was with respect to the execution of three pipelines contracts. The scope of the works included designing, engineering, procuring, constructing, completing, commissioning operating and maintaining the whole of the said works for two years from the date of commissioning. For execution of the works involved in the aforesaid work orders, the assessee required steel plates of stipulated and approved quality for converting them into steel pipes under the supervision and direction of the customer. The payments for the plates and job work charges for fabrication were made directly by the customer.

The assessee claimed exemption from the payment of sales tax in respect of resale of steel plates used in the execution of the works as was admissible under Entries Nos. 119 and 255(4) of the Notifications issued under Section 49(2) of the Gujarat Sales Tax Act, 1969. The Revenue raised a demand claiming that the assessee had sold the pipes and not plates. Since pipe was a commodity different from plate, the assessee was not entitled to deduction of resale. The assessee argued that tax on transfer of property in goods involved in execution of works contract is not on the basis of form on which the goods pass on to

34 Tax Digest

the buyer but on the value of such goods involved in the execution of works. When the plates were converted, in compliance with the contractual requirement, to pipes, the property in the goods, i.e., steel plates, got incorporated into the works contract, leading to the deemed incidence of sale at that very point. It is submitted that since the benefit of the entry 119 is available to goods that are “resold,” the transfer of the plates into pipes, and resultant incorporation into the works contract, amounts to “resale” directly falling within the parameters of entry 119/255(4) [referred above], thereby not attracting tax.

The HC observed that the steel plates converted into steel pipes after undergoing process by the job worker/third parties certainly result in the emergence of a new and distinct commodity, viz., steel pipes. The original plates do not remain the original plates; they become steel pipes. Thus, in the circumstances, not only is there is manufacture but also an activity that is something beyond manufacture. A new product is brought into existence and thereafter steel pipes are supplied. This amounts to “sale.” Merely because in the contract for laying down pipelines a particular quality and/or thickness of the steel plates was agreed to be used and/or the steel plates were required to be purchased from the particular manufacturer, it cannot be said that there was a contract for supply/sale of steel plates as contended by the assessee. As such, there was no contract at all for sale/supply of steel plates by the assessee.

Thus, the HC held that the assessee was liable to pay tax on the supply of steel pipes.

Essar Projects (India) Limited v. State of Gujarat; [TS-36-HC-2018(GUJ)-VAT]

High Court, Allahabad

“Charger” in singular retail “mobile” package not taxable separately

Uttar Pradesh VAT Act, 2008; in favor of assessee

The issue in this case was whether a mobile charger when sold as part of a composite package comprising the said article as well as a mobile phone is liable to be taxed separately treating it to be an unclassified item under the provisions of the Uttar Pradesh VAT Act 2008 (the Act).

The issue had arisen consequent to the revenue taking position that a charger is liable to be taxed separately in light of the decision rendered by the SC in the case of State of Punjab v. Nokia India Pvt. Ltd. [2014 (16) SCC 410].

The HC observed that a careful consideration of the decision rendered by the SC in Nokia (supra) establishes that the contention urged before the court was that the charger as well as the mobile phone when placed in a singular package were liable to be viewed as composite goods. In that context, the SC held that merely by packaging the mobile phone and its charger together would not make them composite goods.

The HC further observed that it was pertinent to bear in mind that a decision rendered by a court primarily has three basic postulates. The first is the facts in the backdrop of which the decision is rendered. The second comprises the submissions and the issues of law or fact that are urged for the consideration of the court. The third pillar of the judgment is the principle of law which the court ultimately formulates and declares. The quest to discern and identify the ratio of a precedent requires the judgment to be read in its entirety, not to be misled by every singular observation, as also to bear in mind always the factual backdrop in which it comes to be rendered as well as the questions that are raised for the consideration of the court. The ratio of a decision can neither be culled out nor recognized without due consideration being conferred on the aforementioned factors.

The contention that was urged before this court, namely that the sale of the mobile phone along with its charger in a single retail package constitutes a composite contract and requires the application of the dominant intention test, was neither urged nor considered by the SC. Consequently, in Nokia (supra), the SC did not record any finding nor did it declare the law to be that the sale of a mobile phone and its charger in a single retail package would not constitute a composite contract. Further, the situation that a single retail package that bears one MRP cannot be severed and the articles contained therein assessed separately was also one that was neither urged nor canvassed in Nokia (supra) and therefore consequently not considered. On an overall consideration of the aforesaid aspects, the HC was unable to hold that Nokia (supra) is a precedent on the question of a composite contract being subjected to tax.

35 Tax Digest

The HC further noted that where the mobile phone and charger are sold as part of a composite package, the primary intent of the contract appears to be the sale of the mobile phone and the supply of the charger is at best collateral or connected to the sale of the mobile phone. Thus, the predominant and paramount intent of the transaction must be recognized to be the sale of the mobile phone. Though a charger can possibly be purchased separately, in case it is placed in a single retail package along with the mobile phone, the primary intent is the purchase of the mobile phone. The supply of the charger is clearly only incidental.

Regard must also be had to the fact that it was a case of composite package, which bears a singular MRP. The charger is admittedly neither classified nor priced separately on the package. It is also not invoiced separately. The MRP mentioned on the package is for the commodities or articles contained therein as a whole. It is not for a particular commodity or individual article contained in the composite retail package.

The Act also does not put in place or engraft any provision which may empower the assessing authority to severe or bifurcate the assessable value of articles comprising a purchase and sale of composite packages.

Thus, the HC held that a charger contained in a composite package cannot be exigible to tax separately.

Samsung (India) Electronics Pvt. Ltd. v. Commissioner of Commercial Taxes U.P. Lucknow; [TS-12-HC-2018(ALL)-VAT]

High Court, Madras

HC affirms local levy on goods purchased through e-auction; bidding from outside state inconsequential

Tamil Nadu General Sales Tax Act, 1959 and Central Sales tax Act, 1956; in favor of Revenue

The assessee participated in an e-auction conducted by the Customs Department for the purchase of PVC resin. Being an e-auction, the assessee, whose registered office is in Mumbai, bid in the auction at Mumbai. On being declared

as a successful bidder, the assessee remitted the bid amount along with 4% Central Sales tax for which a receipt was issued by the Customs Department based upon the Form C declaration issued by the assessee.

The Commissioner of Commercial taxes issued a clarification to the assessee that an auction sale concludes in the state itself and the seller has to pay local tax. The question of filing Form C does not arise. The assessee filed a writ petition to the HC to quash the clarification and direct the Revenue to adjudicate the issue relating to situs of sale in a manner prescribed under the provisions of the Central Sales tax Act, 1956 and the Tamil Nadu General Sales Tax Act, 1959. The assessee contended that it participated in the e-auction from Mumbai, which occasioned the movement of goods, and therefore it was an interstate sale.

The HC observed that as per the terms and conditions of the auction, on receipt of payment of the sale value along with the taxes and duties, a delivery order will be issued and the period of delivery will be seven calendar days counted from the date of the delivery order or the date of the release order. Before participating in the auction, the assessee was required to inspect the material and satisfy by himself, and no plea or misunderstanding and ignorance could be pleaded. Further, the conditions of caution stated that all sale would be treated as local sale and the buyer has to pay sales tax as per the Local Sales Tax Act.

The assessee’s submission could not be accepted for the reason that though it participated in the e-auction (which was probably to facilitate the bidding process), the materials were inspected by the assessee within the control of the Customs House, Chennai, and the goods were delivered on the payment of the full sale value, including taxes at Chennai. Merely because one of the officers of the Customs Department issued a receipt to the assessee accepting 4% tax, it would not prevent the Revenue from taking appropriate steps to recover the tax payable in the state of Tamil Nadu.

The HC thus affirmed local levy on goods purchased through an e-auction in spite of the bidding being done from outside the state.

Surbhit Impex Private Limited v. The Principal Commissioner and Commissioner of Commercial Taxes, Chennai and others; [TS-387-HC-2017(MAD)-VAT]

36 Tax Digest

Customs Duty

Customs Notifications (Non-tariff)

• Specified provisions of Central Goods and Services Tax Act, 2017 come into force

CBEC has issued Customs (Furnishing of Information) Rules, 2017, which prescribe class of persons, nature of transactions, information receiving authority, formats, periodicity and manner of furnishing information.

The Rules come into effect from 01 January 2018.

Notification No. 114/2017 – Customs (NT) dated 14 December 2017

Notification No. 2/2018 – Customs (NT) dated 05 January 2018

Customs Notifications (Tariff)

• Extending the benefit of concessional rate of customs duty under the India-Japan Comprehensive Economic Partnership Agreement

The Central Government has extended the benefit of concessional rate of custom duty to goods falling under HSN 8708 40 00, which covers gear box and parts thereof of specified motor vehicles when imported under the India-Japan Comprehensive Economic Partnership Agreement.

The notification will be effective from 01 January 2018.

Notification No. 94/2017 – Customs dated 22 December 2017

• Extending the benefit of concessional rate of customs duty under the India-Korea Comprehensive Economic Partnership Agreement

The Central Government has extended the benefit of concessional rate of custom duty to specified goods when imported under the India-Korea Comprehensive Economic Partnership Agreement.

The notification will be effective from 01 January 2018.

Notification No. 95/2017 – Customs dated 22 December 2017

• Extending the benefit of concessional rate of customs for import made from ASEAN countries

The Central Government has extended the benefit of concessional rate of customs duty to specified goods when imported from the member states of Association of Southeast Asian Nations (ASEAN).

The notification will be effective from 01 January 2018.

Notification No. 96/2017 – Customs dated 29 December 2017

• Extending the benefit of concessional rate of customs under the India-Malaysia Comprehensive Economic Cooperation Agreement

The Central Government has extended the benefit of concessional rate of customs duty to specified goods when imported under the India-Malaysia Comprehensive Economic Cooperation Agreement.

The notification will be effective from 01 January 2018.

Notification No. 97/2017 – Customs dated 29 December 2017

• Inclusion of the Dhamra and Dighi ports in the list of ports mentioned in the Export Promotion Schemes Notifications

The Central Government has included Dhamra and Dighi ports in the list of ports mentioned in Export Promotion Scheme Notifications.

Notification No. 3/2018 – Customs dated 12 January 2018.

• Grant of customs duty and IGST exemption on import of specified professional equipment and sports goods

The Central Government has exempted specified goods classified under the broad category, viz., equipment for the press, sound and television broadcasting, equipment for testing or measuring or calibration and sports goods, from the whole of the

Key statutory updates

37 Tax Digest

basic custom duty and IGST leviable when imported under a Carnet guaranteed by the Federation of Indian Chamber of Commerce and Industry in India as per the provisions of the Customs Convention on ATA Carnet for temporary admission of goods.

Notification No. 4/2018 – Customs dated 18 January 2018.

• Education Cess and Secondary and Higher Education Cess leviable on import of goods exempted

The Central Government has exempted all goods imported into India from the whole of Education Cess and Secondary and Higher Education Cess leviable on such imports.

Notification No. 7 and 8/2018 – Customs dated 02 February 2018

• Notification exempting Education Cess and Secondary and Higher Education Cess leviable on imported goods rescinded

The Central Government has rescinded the notifications that exempted Education Cess and Secondary and Higher Education Cess leviable on import of goods.

Notification No. 9 and 10/2018 – Customs dated 02 February 2018

• Social Welfare Surcharge exempted on certain import of goods

Clause 108 of the Finance Bill, 2018 provides for the levy of Social Welfare Surcharge on import of goods specified in the First Schedule to the Customs Tariff Act, 1975 CTA). The Central Government has exempted certain specified goods from the levy of Social Welfare Surcharge

Notification No. 11/2018 – Customs dated 02 February 2018

• Reducing the rate of Social Welfare Surcharge on certain goods

The Central Government has exempted the Social Welfare Surcharge in excess of 3% on import of motor spirit, high-speed diesel and silver and gold unwrought

or in semi-manufactured forms, or in powder form. Therefore, Social Welfare Surcharge on import of such goods will be levied at the rate of 3%.

Notification No. 12/2018 – Customs dated 02 February 2018

• Exemption from Social Welfare Surcharge leviable on Integrated Tax and GST Compensation Cess

The Central Government has exempted the goods specified in the First Schedule to the CTA when imported into India from the whole of the Social Welfare Surcharge leviable on IGST and GST Compensation Cess.

Notification No. 13/2018 – Customs dated 02 February 2018

• Notification prescribing reduced rate of additional duty of customs (Road Cess) rescinded

The Central Government has rescinded Notification No. 6 and 7/2015 – Customs dated 01 March 2015 exempting additional duty of customs (commonly known as Road Cess) on motor spirit and high-speed diesel in excess of INR6 per liter leviable under Section 103 of the Finance (No. 2) Act, 1998 and Section 116 of the Finance Act, 1999.

Notification No. 15 and 16/2018 – Customs dated 02 February 2018

• Notification exempting additional duty of customs on import of motor spirit and high-speed diesel rescinded

The Central Government has rescinded Notification No. 57/98 – Customs dated 01 August 1998 and 59/99 – Customs dated 11 May 1999, which had exempted motor spirit and high-speed diesel from the additional duty of customs leviable under Section 3(1) of the CTA.

Notification No. 17 and 18/2018 – Customs dated 02 February 2018

• Additional duty of customs (Road Cess) on import of motor spirit and high-speed diesel exempted

The Central Government has exempted the additional duty of customs (Road Cess) on motor spirit and high-

38 Tax Digest

speed diesel leviable under Section 103 of the Finance (No. 2) Act, 1998 and Section 116 of the Finance Act, 1999.

Notification No. 19 and 20/2018 – Customs dated 02 February 2018

• Countervailing Duty (CVD) on motor spirit and high-speed diesel partially exempted

The Central Government has exempted motor spirit and high-speed diesel when imported into India from additional duty of customs leviable under Section 3(1) of the CTA as is equivalent to the Additional Duty of Excise (Road and Infrastructure Cess) leviable under clause 110 of the Finance Bill, 2018.

Notification No. 21/2018 – Customs dated 02 February 2018

Customs Circulars

• Clarification on Customs (Import of Goods at Concessional Rate of Duty) Rules, 2017

As per Rule 5(2) of the Customs (Import of Goods at Concessional Rate of Duty) Rules, 2017, an importer in order to avail the exemption provided vide a notification issued under Section 25 (1) of the Customs Act is required to submit such surety or security as deemed appropriate by the Deputy Commissioner or Assistant Commissioner of Customs.

The Circular provides the revised quantum of bank guarantee/cash security with respect to different categories of imports availing exemption, to simplify the business procedure and reduce the burden of compliance cost.

Circular No. 48/2017-Customs dated 08 December 2017

• Refund/claim of countervailing duty as duty drawback

The Circular clarifies that countervailing duties leviable under Section 9 of CTA are rebatable as drawback in terms of Section 75 of the Customs Act and provides the procedure for claiming the drawback.

Circular No. 49/2017-Customs dated 12 December 2017

• Sale of goods and display of prices at duty-free shops in Indian currency

The Central Government has decided to extend the facility of payments in Indian rupees through Indian debit card or credit card at duty-free shops without any need for conversion of foreign currency into Indian rupees, subject to the prescribed conditions.

Further, it has also been decided that for effective implementation of the decision, the price of all goods on sale be displayed mandatorily in Indian rupees only.

Circular No. 50/2017-Customs dated 18 December 2017

• Implementing electronic sealing for containers by exporters under self-sealing procedure

The circular relaxes the requirement of mandatory e-sealing in view of insufficient stock of e-seals with empaneled vendors.

Circular No. 51/2017-Customs dated 21 December 2017

• Customs procedure for export of cargo in containers and closed bodied trucks from inland container depots (ICD) or container freight stations (CFS) through land customs stations

The circular prescribes the procedure for export of goods to Nepal or Bangladesh from ICDs or CFSs through land customs stations.

Circular No. 52/2017-Customs dated 22 December 2017

• Guidelines for the sale of seized/confiscated gold

The circular provides that, in addition to the centers (viz., Mumbai, New Delhi, Calcutta, Chennai, Ahmedabad, Jaipur, Cochin, Bengaluru and Shillong), the sale of seized/confiscated gold found ripe for disposal can be done at all the centers of the State Bank of India and all public sector banks, MMTC Ltd. and STC Limited that also have authorization from

39 Tax Digest

their competitive authorities/head offices to dispose of/sell the seized/confiscated gold handed over to them.

Circular No. 01/2018-Customs dated 11 January 2018

• Know Your Customer (KYC) norms

The circular specifies the procedure and documentary requirements for undergoing the KYC procedure.

It further provides that if a firm, company or institution is registered under GST laws, GSTIN shall suffice as the document for KYC purpose. In cases where such entity is not registered under GST laws, the Unique Identification Number or PAN shall serve as the document for KYC verification.

Circular No. 02/2018-Customs dated 12 January 2018

• Amendment in the Authorized Economic Operator (AEO) program

In view of additional benefits assigned to AEO-certified entities consequent to the mid-term review of the Foreign Trade Policy and in order to maximize the reach of the AEO program, it was decided to decentralize the processing of AEO applications so as to meet the objective of trade facilitation and ease of doing business.

Accordingly, the CBEC has amended its previous Circular no. 33/2016 dated 22 July 2016.

Circular No. 3/2018-Customs dated 17 January 2018

• Prerequisites and precautions for successful processing of refund claims

In view of errors incurred by exporters while claiming refund, the CBEC had issued Circular No. 42/2017 dated 07 November 2017. This resulted in reduction in errors. With the view to assist exporters to file error-free refund claims, the CBEC has issued the present circular, which specifies prerequisites and precautions that need to be taken for successful processing of refund claims.

Circular No. 05/2018-Customs dated 23 February 2018

Foreign Trade Policy (FTP)

FTP - Notifications

• DGFT notifies revised FTP after mid-term review

Directorate General of Foreign Trade (DGFT) has notified the revised FTP after a mid-term review. The FTP has been amended suitably in view of the introduction of the GST. Changes include increase in the Merchandise Export from India Scheme (MEIS) incentives from 2% to 4% and a 2% increase in incentives under the Services Exports from India Scheme (SEIS). The validity for duty credit scrips has been increased from 18 months to 24 months

Notification No. 41/2015-2020 dated 05 December 2017

• DGFT notifies the export policy

DGFT notifies Schedule 2, Export Policy of Indian Trade Classification (Harmonized System) of Export Items, 2018 (ITC (HS), 2018). Schedule 2 of ITC (HS), 2018 contains current export policy of items indicated along with policy conditions to be fulfilled, if any.

Notification No. 47/2015-2020 dated 31 January 2018

• Import policy updated with respect to specified edible/food products

Consequent to the modification in Section 3 of the Food Safety and Standards (Import) Regulation, 2017, Para 4(A) of the General Notes regarding import policy of ITC (HS), 2017, Schedule I (Import Policy) has been updated. Import of all edible/ food products governed by Food Safety and Standards (Import) Regulation, 2017 will be subject to the condition that, at the time of import, the products have a valid shelf life of not less than 60% of their original shelf life or three months before expiry, whichever is less at the time of import.

Notification No. 49/2015-2020 dated 05 February 2018

40 Tax Digest

FTP - Circulars

• Revision of annual average export obligations

Re-fixation of annual average export obligation for Export Promotion Capital Goods (EPCG) authorizations is permitted in case exports in any sector/product group decline by more than 5%. Vide this Circular, the list of such product groups showing the percentage decline in exports during 2016-17, as compared to 2015-16 and thus entitled for relief, has been published. All regional offices are directed to re-fix the annual average export obligation for EPCG authorizations for the year 2016-17 accordingly.

Circular No. 03/2015-2020 dated 21 November 2017

FTP - Trade Notices

• Application fee for grant of import authorization

Currently, importers who apply for authorization for import of restricted items follow the practice of submitting the application fee, prescribed in Appendix 2K of FTP 2015-2020, only on approval of such application. It is clarified that the fee prescribed is a processing fee and therefore importers are required to submit the prescribed fee on making the application and not approval of such application by the authorities. The application along with fees may only be deposited at the Regional Authority’s office. While submitting the application in DGFT, a copy of the fee paid must be attached, otherwise the application will not be processed and import authorization will not be issued.

Trade Notice No. 22/2018 dated 11 December 2017

• Checking of shipping bill transmission status on ICEGATE and DGFT websites

As there is a possibility of delays in the transmission of shipping bill data from the Customs Port Offices to the ICEGATE server and subsequently to the DGFT server, exporters are advised to check the SB transmission status first on the ICEGATE website and then on the DGFT website after 72 hours from the integration of the shipping bill with ICEGATE. If the

shipping bill data is not available on both the ICEGATE and the DGFT websites, the issue should be reported to the concerned authorities.

Trade Notice No. 23/2018 dated 06 February 2018

FTP - Public Notices

• Revised edition of the Handbook of Procedures of FTP 2015-2020

Pursuant to the release of the revised FTP 2015-2020 after a mid-term review, DGFT has notified the revised edition of the Handbook of Procedures. It comes into force with effect from 05 December 2017.

Public Notice No. 43/2015-2020 dated 05 December 2017

• Amendments to Appendix 3B of FTP 2015-2020

Amendments have been made in the rates of reward for certain items under MEIS for exports made between 01 November 2017 and 30 June 2018. Table 3 specifying the list of ineligible categories for duty credit scrip entitlement under MEIS has also been amended.

Public Notice No. 44/2015-2020 dated 05 December 2017

• SEIS - Eligible period extended to 31 March 2018

The eligible period under the SEIS — Schedule under Appendix 3D as an annexure to the Public Notice No. 3/2015-20 dated 01 April 2015 has been extended to 31 March 2018 from 31 March 2017. The amended rates of reward and conditions for rewards have been specified in the annexure to the Public Notice.

Public Notice No. 45/2015-2020 dated 05 December 2017

• SEIS - Amendment to Appendix 3E

Ground handling services for air transport have been included in the list of services where payment that has been received in Indian rupees can be treated as receipt in deemed foreign exchange as per the guidelines of the RBI in terms of Para 3.08(c) of FTP 2015-2020.

41 Tax Digest

Public Notice No. 46/2015-2020 dated 05 December 2017

• New Appendices 5E and 5F under the EPCG Scheme of FTP 2015-2020

New Appendices 5E (Computation of Annual Average Export Obligation under EPCG Scheme) and 5F (List of capital goods not permitted/permitted subject to specific conditions for import under EPCG Scheme) of FTP 2015-2020, have been notified.

Public Notice No. 47/2015-2020 dated 06 December 2017

• Regional offices of the Agricultural and Processed Food Products Export Development Authority (APEDA) authorized under Appendix 2E of FTP 2015-2020

APEDA’s regional offices located in Mumbai, Hyderabad, Bengaluru, Kolkata and Guwahati have been enlisted under Appendix 2E (List of Agencies Authorized to issue Certificate of Origin (Non-Preferential)). Thus, APEDA is now authorized to issue Generalized System of Preferences (GSP) Certificate and Certificate of Origin (Non-Preferential) under Appendix 2E of FTP 2015-2020.

Public Notice No. 50/2015-2020 dated 09 January 2018

• Certificate of Origin of Goods for European Union Generalised System of Preferences (EU-GSP) — Modification of the system as of 01 January 2017.

The transition period for registering under the Registered Exporters (REX) System for EU Generalized System of Preferences (GSP) has been extended to 30 June 2018 from 31 December 2017. After 30 June 2018, benefits under the EU-GSP scheme can only be availed by those exporters who are registered under the REX System and can self-certify the Rules of Origin on a commercial document (instead of a Certificate of Origin issued by the authorized agencies).

Public Notice No. 51/2015-2020 dated 09 January 2018

• Amendments in Ayat Niryat Form (ANF) 4A, 4E, 4F, 4G, 4H and 4I of the Handbook of Procedures 2015-2020

Amendments have been made in ANF 4A, 4E, 4F, 4G, 4H and 4I of the Handbook of Procedures 2015-2020 in light of implementation of GST and non-issuance of export promotion (EP) copies of shipping bills by customs authorities.

Public Notice No. 52/2015-2020 dated 12 January 2018

• Amendments in Appendix 4B of the Handbook of Procedures 2015-2020

The list of banks and nominated agencies in Appendix 4B of the Handbook of Procedures 2015- 2020 has been updated. Appendix 4B contains a list of banks authorized by the RBI to import gold or both gold and silver as specified. It also contains a list of nominated agencies under FTP 2015-2020.

Public Notice No. 53/2015-2020 dated 17 January 2018

• New office address of Indian Industries Association (IIA) of India notified

Change of office address (location) of IIA has notified as an agency to issue Certificate of Origin (Non-Preferential).

Public Notice No. 54/2015-2020 dated 18 January 2018

• Asian Exporters’ Chamber of Commerce and Industry India authorized for issuing Certificate of Origin (Non-Preferential)

Asian Exporters’ Chamber of Commerce and Industry has been authorized to issue Certificate of Origin (Non-Preferential) and added to Appendix 2E (List of Agencies Authorized to issue Certificate of Origin (Non-Preferential)) to Appendices and ANF of FTP 2015-2020.

Public Notice No. 55/2015-2020 dated 18 January 2018

42 Tax Digest

• Amendment in procedure for seeking modification in Importer Exporter Code (IEC)

The procedure for seeking modifications for change of head office address in IEC has been notified. Such application will now have to be made to the new regional authority to whose jurisdiction the applicant is shifting its office instead of the regional authority under whose jurisdiction the applicant currently exists.

Public Notice No. 58/2015-2020 dated 05 February 2018

• Inclusion of seaports located at the Dhamra Port and the Dighi Port as Ports of Registration

Seaports located at the Dhamra Port and the Dighi Port have been included as Ports of Registration in Paragraph 4.37(a) of the Handbook of Procedures 2015-2020 for availing export promotion benefits under Chapter 4 of FTP 2015-2020.

Public Notice No. 61/2015-2020 dated 16 February 2018

• Directives for processing of MEIS claim applications

Regional authorities are directed to process applications for MEIS claims only on the basis of the ITC (HS) Code as specified in the shipping bill except in case of specified ITC (HS) Codes in the Annexure to this Public Notice. This move has been done with the objective of improving ease of doing business, simplifying the procedures, increasing transparency and cutting down delays.

Public Notice No. 62/2015-2020 dated 16 February 2018

• Amendments in ANF 4F and 4G of the Handbook of Procedures 2015-2020

Amendments have been made in ANF 4F (Application for Redemption/No Bond Certificate against Advance Authorisation) and ANF 4G (Application for issue of Duty Free Import Authorisation (DFIA) (including for ARC and Invalidation Letter) of the Handbook of

Procedures 2015-2020 in light of the implementation of GST and non-issuance of EP copies of shipping bills by Customs Authorities.

Public Notice No. 63/2015-2020 dated 22 February 2018

Central Excise

Central Excise - Notifications (Tariff)

• CBEC seeks to rescind Notification No. 10/2015 – Central Excise dated 01 March 2015

Notification No. 10/2015 – Central Excise dated 01 March 2015 notified that the additional duty of excise on motor spirit commonly known as petrol should be calculated at the rate of INR6 per liter.

However, the above notification has been rescinded w.e.f. 02 February 2018.

Notification No. 1/2018 –CX, dated 02 February 2018

• CBEC seeks to rescind Notification No. 11/2015 – Central Excise dated 01 March 2015

Notification No. 11/2015 – Central Excise dated 01 March 2015 notified that the additional duty of excise on high-speed diesel oil should be calculated at the rate of INR6 per liter.

However, the above notification has been rescinded w.e.f. 02 February 2018.

Notification No. 2/2018 – CX, dated 02 February 2018

• CBEC seeks to rescind Notification No. 38/2004 – Central Excise dated 04 August 2004

Notification No. 38/2004 – Central Excise dated 04 August 2004 provided exemption to 5% ethanol-blended petrol from the whole of the additional duty of excise leviable thereon.

However, the above notification has been rescinded w.e.f. 02 February 2018.

Notification No. 3/2018 – CX, dated 02 February 2018

43 Tax Digest

• CBEC seeks to rescind Notification No. 62/2008 – Central Excise dated 24 December 2008

Notification No. 62/2008 – Central Excise dated 24 December 2008 provided exemption to 10% ethanol-blended petrol from the whole of the additional duty of excise leviable thereon.

However, the above notification has been rescinded w.e.f. 02 February 2018.

Notification No. 4/2018 – CX, dated 02 February 2018

• CBEC seeks to rescind Notification No. 21/2009 – Central Excise dated 07 July 2009

Notification No. 21/2009 – Central Excise dated 07 July 2009 provided exemption to bio-diesels from the whole of the additional duty of excise leviable thereon.

However, the above notification has been rescinded w.e.f. 02 February 2018.

Notification No. 5/2018 – CX, dated 02 February 2018

• CBEC seeks to rescind Notification No. 29/2002 – Central Excise dated 13 May 2002

Notification No. 29/2002 – Central Excise dated 13 May 2002 prescribing the effective rate of basic excise duty, additional excise duty (Road Cess) and special additional duty on petrol and diesel manufactured in and cleared from specified refineries in the North East region is rescinded.

Notification No. 6/2018 – CX, dated 02 February 2018

• CBEC seeks to exempt additional duty of excise on motor spirits such as petrol and high speed diesel

Additional duty of excise (Road Cess) leviable on domestically manufactured and produced motor spirit (commonly known as petrol and high-speed diesel oil) has been fully exempted.

Notification No. 7/2018 and 8/2018 – CX, dated 02 February 2018

• CBEC seeks to reduce the rate of basic excise duty on petrol

Basic excise duty on motor spirit (commonly known

as petrol and high-speed diesel oil [both branded and unbranded]) has been reduced by INR2 per liter.

Notification No. 9/2018 – CX, dated 02 February 2018

• CBEC seeks to exempt duties of excise on petrol and diesel manufactured in and cleared from specified oil refineries located in the North East region

Petrol and diesel manufactured in and cleared from four specified oil refineries located in the North East region have been exempted from 50% of the basic excise duty, Road and Infrastructure Cess and special additional excise duty granted them.

Notification No. 10/2018 – CX, dated 02 February 2018

• CBEC seeks to exempt 5% and 10% ethanol-blended petrol and bio-diesels from the additional duty of excise (Road and Infrastructure Cess)

The Road and Infrastructure Cess on ethanol-blended petrol and diesel blended with bio-diesel is being exempted, subject to the condition that appropriate duties of excise have been paid on petrol or diesel and appropriate GST has been paid on ethanol or bio-diesel used for making such blend.

Notification No. 11/2018, 12/2018 and 13/2018 -CX, dated 02 February 2018

Central Excise - Circular

• CBEC issues circular compiling orders that have attained finality and directs the Revenue to decide similar pending cases

The said Circular summarizes 63 orders of different HCs that have been accepted by the Department. No Special Leave Petition (SLP) or any other appeal has been preferred in the SC against such orders.

Part I of the Circular comprises 14 orders of various HCs in which points of law have been decided. Part II comprises the rest 49 cases where the HCs delivered judgments on the basis of some settled case law or decided on points of facts or dismissed the appeal on monetary grounds.

44 Tax Digest

The purpose of this Circular is to expedite decisions on pending cases and to reduce litigations so that cases on similar questions of law or identical cases on facts pending in various jurisdictions can be decided by the field formations accordingly.

Circular No. 1063/2/2018 – CX dated 16 February 2018

Value Added Tax (VAT)/Central Sales tax (CST)

Maharashtra

• Clarification with regard to the taxation of natural gas under the MVAT Act

It is clarified that the manufacturer buyer who was not holding a registration certificate under the MVAT Act on or after 01 July 2017 either due to cancelation of the said registration certificate or due to the deeming provision relating to the cancelation of the registration certificate under Section 16(6A) of the MVAT Act, shall not be entitled for the benefits of the reduced rate of tax of 3% in respect of use of natural gas in manufacturing for the period 24 August 2017 to 13 October 2017.

Trade Circular No. 3T of 2018 dated 16 January 2018

• Date for filing of the VAT Audit Report in Form 704 for the year 2016-17 extended from 15 January 2018 to 15 February 2018.

Trade Circular No. 2T of 2018 dated 12 January 2018

Gujarat

• Amendment to Gujarat VAT (GVAT) Rules, 2006

The following provisions have been added in the GVAT Rules:

• Every registered dealer whose taxable turnover is more than INR25 lakh for the period 01 April 2017 to 30 June 2017 shall furnish a final return for such period within seven months from 01 July 2017.

• Registered dealers who have furnished a final return for the period from 01 April 2017 to 30 June 2017 in accordance with the provisions of sub-rule (4) of rule 44 shall be deemed to have filed the annual return for the year 2017-2018.

• Every registered dealer whose amount of tax credit is carried forward for more than INR5 lakh on 30 June 2017 shall get the books of accounts related to the final return, duly audited by a Chartered Accountant or a Cost Accountant and furnish, by way of uploading on the website, a certificate in Form 217A duly signed by them within seven months from 01 July 2017.

Notification No. (GHN-05)VAR-2018(47) –TH dated 19 January 2018

Goods and Services tax (GST)

Notifications - Central Tax (CT) - (Non-rate)

• Due date for filing Form GST ITC-01 extended

The Central Government has extended the time limit for making a declaration in Form GST ITC-01 by the registered persons who have become eligible during the months of July 2017, to November 2017 to the effect that they are eligible to avail the ITC under Section 18(1) of the Central Goods and Services Tax Act, 2017 (CGST Act) till 31 January 2018.

Notification No. 67/2017 – (CT) dated 21 December 2017

• Due date for filing Form GSTR-5 extended

The Central Government has extended the time limit for furnishing the return by a non-resident taxable person in Form GSTR-5 for the months of July 2017 to December 2017 till 31 January 2018.

Notification No. 68/2017 –CT dated 21 December 2017

• Due date for filing Form GSTR-5A extended

The Central Government has extended the time limit for furnishing the return in Form GSTR-5A for the

45 Tax Digest

months of July 2017 to December 2017 by a person supplying online information and database access or retrieval services from a place outside India to a non-taxable online recipient till 31 January 2018.

Notification No. 69/2017 –CT dated 21 December 2017

• Amendment to CGST Rules, 2017

The formats of Form GSTR-1, Form GST RFD-01 and Form RFD-01A have been amended.

Notification No. 70/2017 –CT dated 21 December 2017

• Due date for quarterly furnishing of Form GSTR-1 for taxpayers having aggregate turnover up to INR1.5 crore extended

The Central Government has extended the due date for filing quarterly Form GSTR-1 by taxpayers having aggregate turnover up to INR1.5 crore for the quarter July 2017 to September 2017 from 31 December 2017 to 10 January 2018. The due date for filing quarterly Form GSTR-1 remains unchanged for the quarters October 2017 to December 2017 and January 2018 to March 2018, i.e., 15 February 2018 and 30 April 2018 respectively.

Notification No. 71/2017 –CT dated 21 December 2017

• Due dates for monthly furnishing of Form GSTR-1 for taxpayers having aggregate turnover of more than INR1.5 crores extended

The Central Government has extended the due date for filing monthly Form GSTR-1 by taxpayers having aggregate turnover of more INR1.5 crore for the months July 2017 to October 2017 from 31 December 2017 to 10 January 2018. The due date for filing monthly Form GSTR-1 remains unchanged for the period November 2017 to March 2018.

Notification No. 72/2017 –CT dated 29 December 2017

• Late fee for delayed filing of Form GSTR-4 reduced

The Central Government has reduced the amount of late fee payable for delay in filing Form GSTR-4 from INR200 per day (INR100 each under the CGST and SGST Acts) to INR50 per day (INR25 each under CGST and SGST Acts).

Further, where the tax payable in nil, the late fee payable has been reduced to INR20 per day (INR10 each under the CGST and SGST Acts).

Notification No. 73/2017 –CT dated 29 December 2017

• Date from which e-Way Bill Rules shall come into force notified

The Central Government has notified 01 February 2018 as the date from which the e-Way Bill Rules shall come into force.

Notification No. 74/2017 –CT dated 29 December 2017

• Amendments to CGST Rules, 2017

The Central Government has amended CGST Rules. The amendment, inter alia, includes insertion of Rule 89 (4A) and (4B) for refund in specified cases.

Notification No. 75/2017 –CT dated 29 December 2017

• Amendment to rates under composition for manufacturers and other suppliers

The Central Government has reduced the CGST composition rate for manufacturer from 1% to 0.5%.

Further, the CGST composition rate for “other suppliers” has been reduced from 0.5% of the turnover to 0.5% of the taxable turnover.

Notification No. 1/2018 –CT dated 01 January 2018

• Due date for filing Form GSTR-3B for December, 2017 extended

The Central Government has extended the date for filing Form GSTR-3B for the month of December 2017 from 20 January 2018 to 22 January 2018.

Notification No. 2/2018–CT dated 20 January 2018

46 Tax Digest

• Amendment to the CSGT Rules, 2017

The Central Government has amended CGST Rules. The amendment is in respect of rules relating to composition, value of supply, ITC, invoice, refund and e-way bill.

Notification No. 3/2018-CT dated 23 January 2018

• Late fee for delayed filing of Form GSTR-1 reduced

The Central Government has reduced the amount of late fee payable for delay in filing Form GSTR-1 from INR200 per day (INR100 each under the CGST and SGST Acts) to INR50 per day (INR25 each under the CGST and SGST Acts).

Further, where there are no outward supplies in any month/quarter, the late fee payable has been reduced to INR20 per day (INR10 each under CGST and SGST Acts).

Notification No. 4/2018 –CT, dated 23 January 2018

• Late fee for delayed filing of Form GSTR-5 reduced

The Central Government has reduced the amount of late fee payable for delay in filing Form GSTR-5 from INR200 per day (INR100 each under the CGST and SGST Acts) to INR50 per day (INR25 each under the CGST and SGST Acts).

Further, where the tax payable in nil, the late fee payable has been reduced to INR20 per day (INR10 each under the CGST and SGST Acts).

Notification No. 5/2018 –CT dated 23 January 2018

• Late fee for delayed filing of Form GSTR-5A reduced

The Central Government has reduced the amount of late fee payable for delay in filing Form GSTR-5A from INR200 per day (INR100 each under the CGST and SGST Acts) to INR50 per day (INR25 each under the CGST and SGST Acts).

Further, where the tax payable in nil, the late fee payable has been reduced to INR20 per day (INR10 each under the CGST and SGST Acts).

Notification No. 6/2018 –CT dated 23 January 2018

• Late fee for delayed filing of Form GSTR-6 reduced

The Central Government has reduced the amount of late fee payable for delay in filing Form GSTR-5A from INR200 per day (INR100 each under CGST and SGST Acts) to INR50 per day (INR25 each under CGST and SGST Acts).

Notification No. 7/2018 –CT dated 23 January 2018

• Due date for filing Form GSTR-6 extended

The Central Government has extended the time limit for furnishing the return by an Input Service Distributor in Form GSTR-6 for the months of July 2017 to February 2018 till 31 March 2018.

Notification No. 8/2018 –CT, dated 23 January 2018

• E-way bill website notified

The Central Government has notified www.gst.gov.in as the Common Goods and Services Tax Electronic Portal for facilitating various activities such as registration, payment of tax and furnishing of returns and www.ewaybillgst.gov.in as the portal for furnishing e-way bills.

Notification No. 9/2018 –CT dated 23 January 2018

• Cross-empowerment of state tax officers for processing and grant of refund

The Central Government has empowered the officers appointed under respective state and union territory GST statutes as the proper officers for the purpose of sanction of refund of integrated tax paid on export of services.

Notification No. 10/2018 –CT dated 23 January 2018

• E-way bill rules postponed

The Central Government has postponed the effective date for implementation of e-way bills. The revised date is not yet prescribed.

Notification No. 11/2018 –CT dated 02 February 2018

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Notifications - Central Tax (Rate)

• GST on reverse charge on supply of renting of immovable property service by Government to any registered person

GST will be levied on reverse charge basis on the supply of renting of immovable property service by the Central/state/union territory government or local authority to a person registered under the CGST Act.

Notification No. 3/2018 – CT (rate) dated 25 January 2018

• Time of supply in case of registered persons supplying development rights in exchange of construction service and vice versa

Where a registered person is supplying development rights to a person in exchange of construction service and vice versa, the liability to pay GST shall arise at the time when the said developer, builder, construction company or any other registered person, as the case may be, transfers possession or the right in the constructed complex, building or civil structure, to the person supplying the development rights by entering into a conveyance deed or similar instrument like allotment letter.

Notification No. 4/2018 – CT (rate) dated 25 January 2018

• GST rate on supply of old and used motor vehicles reduced

The Central Government has reduced the rate on supply of old and used motor vehicles from 28% to 12%/18% subject to the conditions prescribed.

Notification No. 8/2018 – CT (rate) dated 25 January 2018

Central Tax Circulars

• Treatment of supply by an artist in various states and supply of goods by artists from galleries

The circular clarifies that the art work for supply on approval basis can be moved from the place of business of the registered person, i.e., artist to another place within the same state or to a place outside the state, on a delivery challan along with the e-way bill wherever applicable and the invoice may be issued at the time of actual supply of art work.

It also clarifies that interstate supplies of art work will attract IGST.

It further clarifies that in case of supply by artists through galleries, there is no consideration flowing from the gallery to the artist when the art works are sent to the gallery for exhibition and therefore it is not a supply. It is only when the buyer selects a particular art work displayed at the gallery that the actual supply takes place and the applicable GST would be payable at the time of such supply.

Circular No. 22/22/2017-GST dated 21 December 2017

• Maintenance of books of accounts relating to additional place of business by a principal or an auctioneer for the purpose of auction of goods

The Circular clarifies that the principal and auctioneer are required to declare the warehouse where goods are stored as their additional place of business. The buyer is also required to disclose such warehouse as their additional place of business if they want to store the goods purchased through auction in such warehouses.

It further clarifies that this Circular is applicable to the supply of goods where the auctioneer claims ITC in respect of the supply made to them by the principal before the auction of such goods and the said goods are supplied only through auction.

Circular No. 23/23/2017-GST dated 21 December 2017

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• Manual filing and processing of refund claims

The Circular provides the procedure for manual filing of refund claims on account of inverted duty structure, deemed exports and excess balance in the electronic cash ledger.

Circular No. 24/24/2017-GST dated 21 December 2017

• Manual filing of applications for advance ruling and appeals before Appellate Authority for Advance Ruling

The Circular prescribes the procedure for manual filing of applications for advance ruling and filing of appeals before the appellate authority against the decision of the Advance Ruling Authority.

Circular No. 25/25/2017-GST dated 21 December 2017

• Return filing under GST

The Circular consolidates the provisions and information of notifications and circulars relating to the return filing procedure and the due dates to ensure uniformity in implementations across field formations.

Circular No. 26/26/2017-GST dated 29 December 2017

• Levy of GST on accommodation services, betting and gambling in casinos, horse racing, admission to cinema, homestays, printing, legal services etc.

The Circular clarifies the levy of GST on supply of certain services such as accommodation services, legal services, printing of books and betting and gambling in casinos.

Circular No. 27/01/2018-GST dated 04 January 2018

• Levy of GST on college hostel mess fees

The Circular clarifies the levy of GST on supply of food or drink provided by a mess or canteen. If catering is one of the services provided by an educational institution to its students, faculty and staff, it is exempt.

However, if catering is provided by anyone other than the educational institution, then it is a supply of service to the concerned educational institution and attracts GST at 5% without ITC.

Circular No. 28/02/2018-GST dated 18 January 2018

• Tax rate on supplies made to the Indian Railways classifiable under any chapter other than Chapter 86

The Circular clarifies that only the goods classified under Chapter 86 and supplied to the Railways would attract 5% GST rate with no refund of unutilized ITC. Supply of goods falling in any other chapter would be taxed at the rate applicable to such goods, even if supplied to the Railways.

Circular No. 30/04/2018-GST dated 25 January 2018

• CBEC empowers Superintendents of Central tax and prescribes internal monetary limits for adjudication of cases under GST

The Circular extends the powers to the subordinate authority to issue SCNs and orders under the CGST and IGST Acts and prescribes internal monetary limits across the hierarchy for optimal distribution of such work.

Circular No. 31/05/2018-GST dated 09 February 2018

• Levy of GST in respect of certain services

The circular clarifies the levy of GST, classification and rate on certain services such as supply of accommodation service by trusts to students, classification of elephant or camel ride, rickshaw ride or boat ride as passenger transport service or recreational, cultural and sporting services etc.

Circular No. 32/06/2018-GST dated 12 February 2018

• Directions regarding non-transition of CENVAT credit or non-utilization thereof in certain cases

CBEC has issued a clarification regarding non-utilization of disputed CENVAT credit carried forward. Vide the circular, CBEC has clarified that CENVAT

49 Tax Digest

credit availed in the pre-GST regime cannot be utilized where litigation initiated under previous law is decided against such availment. It further provides for recovery of interest and penalty in case of utilization.

The circular further provides for submission of an undertaking by such person to the Government that such credit shall not be utilized or has not been availed.

Circular No. 33/07/2018-GST dated 23 February 2018

Central Tax Orders

• Due date for filing Form GST CMP-03 extended

The Central Government has extended the time limit to furnish the details of stock held on the date preceding the date from which the option to pay tax under Section 10 of the Act is exercised in Form GST CMP-03, till 31 January 2018.

Order 11/2017 – GST dated 21 December 2017

Integrated Tax Notifications (Non-rate)

• Amends Notification No. 11/2017 - Integrated Tax dated 13 October 2017 for cross-empowerment of state tax officers for processing and grant of refund

Officers appointed under the respective state/union territory GST statute were not notified as “proper officers” in respect of Rule 96 of the CGST Rules, 2017 as applicable to integrated tax. Rule 96 provides for refund of integrated tax paid on goods or services exported out of India. Vide this notification, such officers are now empowered to grant refund of integrated tax where it is related to export of services.

Notification No. 01/2018 – Integrated Tax, dated 23 January 2018

Integrated Tax Notifications (Rate)

• IGST rates on certain services reduced

GST rates have been reduced for certain services such as works contract services (WCS) (from 18% to 12%) provided by a sub-contractor to the main contractor providing WCS to the Government or a Government entity. If the main WCS attract 12% GST, then the sub-contractor will also be liable at 12%. For WCS attracting 5% GST, the sub-contractor will be liable at 5%.

Notification No. 01/2018- Integrated Tax (Rate) dated 25 January 2018

• Amending exempted services based on the 25th GST Council meeting

Certain services such as services by way of transportation of goods from India to a place outside India by air (sunset clause up to 30 September 2018), life insurance services by the Naval Group Insurance Fund to the Coast Guard personnel, services by way of reinsurance of specified insurance schemes etc. have been exempted from integrated tax.

Notification No. 02/2018- Integrated Tax (Rate) dated 25 January 2018

• GST on reverse charge on supply of renting of immovable property service by the Government to any registered person

GST will be levied on a reverse charge basis on supply of renting of immovable property service by the Central/state/union territory government or local authority to a registered person.

Notification No. 03/2018- Integrated Tax (Rate) dated 25 January 2018

• Time of supply in case of registered persons supplying development rights in exchange of construction service and vice versa

Where a registered person is supplying development rights to a person in exchange of construction service and vice versa, the liability to pay GST shall arise at the time when the said developer, builder, construction

50 Tax Digest

company or any other registered person, as the case may be, transfers possession or the right in the constructed complex, building or civil structure, to the person supplying the development rights by entering into a conveyance deed or similar instrument such as an allotment letter.

Notification No. 04/2018- Integrated Tax (Rate) dated 25 January 2018

• The Government’s share of profit petroleum exempted from Integrated Tax

The supply of services by way of grant of license or lease to explore or mine petroleum crude or natural gas has been exempted from IGST to the extent of the consideration paid to the Government in the form of the Government’s share of profit petroleum.

Notification No. 05/2018- Integrated Tax (Rate) dated 25 January 2018

• Exempting royalty and license fee from IGST if Customs Duty has been paid on it

Royalty and license fees under the category of import of services have been exempted from IGST to the extent they are included in the value of goods imported and IGST is paid on such imported goods.

Notification No. 06/2018- Integrated Tax (Rate) dated 25 January 2018

• Amending IGST rates on goods based on 25th GST Council meeting

GST rates have been reduced for certain goods such as 20 liter drinking water bottles (18% to 12%) and LPG supplied for supply to household domestic consumers by private LPG distributors (18% to 5%). However, rates have been increased for goods such as cigarette filter rods (12% to 18%) and rice bran (other than de-oiled rice bran) (nil to 5%).

Notification No. 07/2018- Integrated Tax (Rate) dated 25 January 2018

• Amending IGST rates on goods based on the 25th GST Council meeting

Goods such as parts and accessories for manufacture of hearing aids, aquatic feed, vibhuti etc. have been exempted from IGST.

Notification No. 08/2018- Integrated Tax (Rate) dated 25 January 2018

• GST rate reduced on supply of old and used motor vehicles

The Central Government has reduced the GST rate on supply of old and used motor vehicles from 28% to 12%/18%, subject to the conditions prescribed.

Notification No. 09/2018- Integrated Tax (Rate) dated 25 January 2018

Compensation Cess Notifications (Rate)

• Compensation Cess exemption to supply of old and used motor vehicle

All old and used motor vehicles have been exempted from GST Compensation Cess, subject to the condition that no ITC of central excise duty/VAT or GST paid on such vehicles has been availed by the supplier.

Notification No. 01/2018-Compensation Cess (Rate) 25 January 2018

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Foreign Exchange Management Act (FEMA) 1999

Regulatory1. RBI issues master direction on foreign

investment in India

RBI issues the master direction on foreign investment in India. The key points addressed in the master direction are provided below:

• Non-convertible debenture (NCD) proceeds not a borrowing for downstream investment purposes: In terms of the extant regulations, a foreign owned/controlled Indian company (FOCC) can make downstream investment through inward remittance/internal accruals. Additionally, downstream investments could not have been made through domestic leveraged funds. In this connection, RBI has clarified that subscription of NCDs by persons resident outside India will not be construed as funds borrowed/leveraged in the domestic market for the purpose of downstream investment.

• RBI has clarified that in case of transfer of shares of an Indian company by an FOCC to a non–resident/FOCC, pricing guidelines will not be triggered. However, reporting requirement in case of transfer of Indian companies shares from FOCC, a resident under FEMA to non-resident will continue to exist.

• Residents can renounce rights shares in favor of non-residents: RBI has permitted residents to renounce right shares in favor of non-residents under the general permission.

• Late submission fee (LSF) for delay in reporting requirement without undertaking compounding process: Under the extant regulations, the delay in reporting was required to be compounded by RBI and thereafter compounding fee was to paid in accordance with the compounding order. RBI has now introduced LSF for delay in reporting of transactions undertaken on or after 07 November 2017. It is also important to note that LSF is only applicable for delay in reporting. All other contraventions will continue to be compounded as in the past.

RBI has separately specified the matrix for calculation of LSF under the “Master Direction No. 18 on Reporting under FEMA” as above:

• Investment by foreign venture capital investment (FVCI) to be reported in Form ARF and FC-GPR (issue of shares) and FC-TRS (transfer of shares): RBI has provided that investment by an FVCI has to be reported in Form ARF (foreign inward remittance), Form FC-GPR (issue of shares) and FC-TRS (transfer of shares to/from resident).

Source: FED Master Direction No. 11/2017-18 dated 04 January 2018 read with FED Master Direction No.18/2015-16 updated on 02 February 2018

2. RBI permits refinancing of external commercial borrowings (ECB) to overseas branches/subsidiaries of Indian banks

Formerly, only Indian corporates were permitted to refinance their existing ECBs at a lower all-in-cost and the overseas branches/subsidiaries of Indian banks were not permitted to refinance their existing ECBs.

Now, RBI has permitted the overseas branches/subsidiaries of Indian banks to refinance their existing ECBs of highly rated (AAA) corporates as well as navratna and maharatna public sector undertakings (PSUs), provided the outstanding maturity of the original borrowing is not reduced and all-in-cost of fresh ECB is lower than the existing ECB.

It may be noted that partial refinance of existing ECBs will also be permitted subject to the same conditions.

Source: A.P. (DIR Series) Circular No.15 dated 04 January 2018

Amount involved in reporting (in INR)

LSF as a % of amount involved *

Maximum amount of LSF applicable

Up to 10 million

0.05 INR1 million or 300% of the amount involved, whichever is lower

More than 10 million

0.15 INR10 million or 300% of the amount involved, whichever is lower

* The % of LSF will be doubled every 12 months.

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FDI policy

3. Department of Industrial Policy and Promotion (DIPP) notifies the amendments of Press Release issued by the Government of India dated 10 January 2018

DIPP has issued Press Note 1 of 2018 in line with the subject press release wherein the Union Cabinet in its meeting held on 10 January 2018 liberalized the FDI policy in key sectors such as single-brand retail trading (SBRT), construction development and civil aviation.

In this regard, the following amendments have been made in the consolidated FDI policy circular of 2017:

• SBRT: FDI up to 100% has now been permitted under automatic route in SBRT. In terms of the extant FDI policy, FDI up to 49% was permitted under the automatic route and beyond that, approval from the Government was required.

In addition, it has also been decided to permit SBRT entities to set off their incremental sourcing of goods for that single brand (in INR terms) from India, either directly or through group companies, for global operations during the initial five years, against the mandatory sourcing requirement of 30% of purchases from India. After completion of the five-year period, the SBRT entity should be required to meet the 30% sourcing norms directly toward its India’s operation, on an annual basis.

Further, non-resident entity or entities, whether owner of the brand or otherwise, are permitted to undertake “single brand” product retail trading in the country for the specific brand, either directly by the brand owner or through a legally tenable agreement executed between the Indian entity undertaking SBRT and the brand owner.

• Civil aviation: In terms of the extant FDI policy, foreign airlines were permitted to invest up to 49% under the automatic route in companies operating scheduled/non-scheduled air transport services. However, the aforesaid regulation was not applicable to Air India. Now, foreign airlines are permitted to invest up to 49% under approval route

in Air India subject to the condition that foreign investment including investment by foreign airlines in Air India shall not exceed 49%, either directly or indirectly, and substantial ownership and effective control of Air India shall continue to be vested in the Indian national.

• Real estate broking services: It has been specifically clarified that real estate broking service does not amount to real estate business and is therefore eligible for 100% FDI under the automatic route. As per National Industrial Classification (NIC), real estate broking service was covered under the real estate business and hence there was an ambiguity on the permissibility of FDI in companies engaged in real estate broking business. Now, with the proposed change, this ambiguity stands resolved.

• FDI up to 100% under the automatic route will be allowed only for investing companies registered as non-banking financial companies (NBFCs) with RBI. However, FDI in core investment companies (CICs) and other investing companies is permitted under government approval route only. CICs will have to follow RBI’s regulatory framework for CICs.

• Foreign institutional investor (FII)/ foreign portfolio investor (FPI) investment in power exchanges: In terms of the extant FDI policy, FII/FPI purchases were restricted to the secondary market only in power exchanges. Now, FIIs/ FPIs are allowed to invest in power exchanges through the primary market as well.

• Pharmaceuticals: The definition of “medical devices” has been amended in the FDI policy, dropping the reference to the Drugs and Cosmetics Act as the definition as contained in the FDI policy is complete in itself.

• Other changes:

• Issue of equity shares against non-cash considerations such as pre-incorporation expenses and import of machinery should be permitted under general permission in case of sectors under the automatic route.

53 Tax Digest

• Applications involving investment from countries of concern falling under automatic route sectors/activities would be processed by DIPP for government approval instead of the Ministry of Home Affairs. Cases under the government approval route, also requiring security clearance with respect to countries of concern, will continue to be processed by the concerned administrative department/ ministry.

• It has been decided to provide in the FDI policy that wherever a foreign investor wishes to specify a particular auditor/audit firm having an international network for an Indian investee company, then the audit of such investee companies should be carried out as a joint audit wherein one of the auditors should not be part of the same network.

It is pertinent to note that the aforementioned changes in the FDI policy shall be effective from the date of issuance of the notification amending the Foreign Exchange Management (Transfer or Issue of securities by a person resident outside India) Regulations, 2017 [FEMA 20 (R)] by RBI.

Source: Press Note 1 of 2018 dated 23 January 2018 read with Press Release issued by Government of India dated 10 January 2018

54 Tax Digest

Global Trade and Anti-dumping

VS Krishnan, Business Standard

Expectations of the Financial Services Sector

Anish Thacker, Moneycontrol

Fuel investor confidence in ‘Destination India’

Ritika Loganey Gupta, Economic Times Website

Here is what Modi government can do for transfer pricing

Ashwin Vishwanathan, Financial Express

Will the finance minister play a knock to remember or a balanced innings?

Pramod Achuthan, Economic Times Website

Budget may rationalise deductions, exemptions

DNA India

Expecting a populist Budget 2018? FM’s hands could be tied by fiscal constraints

Sonu Iyer, Business Standard

Union Budget 2018 – Transfer Pricing: What to expect?

Rajendra Nayak, TaxSutra

Union Budget 2018 - What does the FM’s budget briefcase have in store?

Pramod Achuthan, TaxSutra

Why FM Arun Jaitley needs to clarify the cash transactions law in Budget 2018

Pinky Khanna, Economic Times Website

Budgeting in the time of GST

VS Krishnan, Hindu Business Line

Centre may bring down number of GST rate slabs

Divyesh Lapsiwala, DNA India

How to claim tax benefit for additional Rs 50,000 investment in NPS

Pinky Khanna, Ecnomic Times Website

Let it grow

Jayesh Sanghvi, Hindu Business Line

Promising outlook for the corporate tax world?

Sunil Kapadia, DNA India

Rules to tax digital economy need of the hour

Pramod Achuthan, DNA India

The e-way bill conundrum

Harishanker Subramaniam, Livemint

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

In the pressWhat MNCs can expect on tax front

Sunil Kapadia, DNA India

GST is unlikely to steal the show

Sachin Agarwal, Hindu Business Line

Fine Print Decoded

Paresh Parekh, Tax Sutra

Building a healthy India in company of senior citizens & inception of tax on LTCG

Mayur Shah, Money Control

FM Arun Jaitley has done good by meeting some expectations on the income tax front

Aditya Modani, Financial Express

Budget’s impact on individual taxpayers

Amarpal S Chadha, Economic Times Website

Make, Sell, Buy in India mantra for Budget 2018

Kunal Chaudhary, Financial Express

Railway Budget 2018 focuses on holistic development of Indian Railways; nothing populist!

Abhay Agarwal, Financial Express

Union Budget 2018: Will the Corporate smile or frown?

Raju Kumar, Financial Express

A slingshot moment for India

Rajiv Memani, Business Standard

An inclusive and pragmatic budget

Rajiv Memani, Mint

Balancing act

Shuddhasattwa Ghosh, Hindu Business Line

Budget 2018 | EXPERT TAKE: MSME auto companies will gain from Budget

Pramod Achuthan, DNA India

Budget 2018: A few, but very focused indirect tax changes

DNA India

Budget 2018: Attempts to incentivise the digital ecosystem in India

Rajiv Chugh, Money Control

Budget 2018: Discipline prevails over populism, says EY India

Ritika Loganey Gupta, Money control

Corporates win some, lose some in Budget 18

Sunil Kapadia, DNA India

55 Tax Digest

Sl. No. Title Date of the alert Citation/Notification/Circular

1. Himachal Pradesh HC rules new units undertaking “substantial expansion” entitled to 100% deduction for fresh five years

06 December 2017 Stove Kraft India v. CIT[ITA No.20/2015]

2 CBDT further extends due date for Aadhaar-PAN linkage to 31 March 2018

08 December 2017 Press Release dated 08 December 2017

3 Rajkot Tribunal grants India-UAE DTAA benefits on shipping income and rules on applicability of limitation of benefits clause

08 December 2017 ITO v. Martrade Gulf Logistics FZCO-UAE[TS-575-ITAT-2017]

4 Global Tax Alert - US IRS may not complete planned bilateral Competent Authority Agreements by year end

11 December 2017 IRS announcement on 30 November 2017 on Competent Authority Agreements

5 Delhi Tribunal rules guarantee fee income received by foreign parent from Indian subsidiary is taxable in India

12 December 2017 Johnson Matthey Public Ltd. Co v DCIT(International Taxation)[TS-578-ITAT-2017(DEL)]

6 Global Tax Alert - India’s positions on permanent establishment in OECD’s 2017 Update to Model Tax Convention and Commentary

15 December 2017 India’s key positions on the PE provisions.

7 Supreme Court applies purpose test to determine nature of subsidy

18 December 2017 CIT v. Chaphalkar Brothers Pune[TS-589-SC-2017]

8 Bombay High Court upholds denial of long-term capital gains exemption for dubious and unexplained transactions in shares

19 December 2017 Sanjay Bimalchand Jain v. CITITA No. 18/2017; Order dated 10 April 2017

9 Supreme Court upholds claim of depreciation of a charitable trust where expenditure on capital asset was already allowed as application of income

22 December 2017 CIT v. Rajasthan and Gujarathi Charitable Foundation Poona[TS-596-SC-2017]

10 PAS Alert - Supreme Court rules higher pension benefit for eligible employees

27 December 2017 SLP No. 33032 - 33033 of 2015

11 CBDT Order on approach for revival of struck off company

03 January 2018 CBDT order F No. 225/423/2017-ITA.II dated 29 December 2017

12 Mumbai Tribunal rules annual franchise fees as deductible revenue expenditure

05 January 2018 Knight Riders SportsPvt. Ltd. v. ACIT

[TS-609-ITAT-2017(Mum)]

Direct Tax

Compilation of Tax Alerts

(Click on the hyperlinks to the title to access the alerts)

56 Tax Digest

13 Mumbai Tribunal rules stamp duty value cannot be deemed as consideration while computing capital gains arising on contribution of land by a partner to the partnership firm which is governed by a specific provision

06 January 2018 DCIT v. Amartara Pvt. Ltd.

[TS-612-ITAT-2017(MUM)]

14 CBDT press release on MAT computation relief for companies subject to Insolvency and Bankruptcy Code, 2016

08 January 2018 CBDT order F No. 225/423/2017-ITA.II dated 29 December 2017

15 Jaipur ITAT rules on revenue recognition as per Percentage of Completion Method for advances received from customers

11 January 2018 Vastukar Township Pvt.Ltd v. DCIT[ITA No. 105/JP/2017]

16 AAR rules transfer of shares in a German company by German shareholders does not trigger tax in India

18 January 2018 GEA Refrigeration Technologies[AAR No. 1232 of 2012]

17 AAR rules on fixed permanent establishment and disposal test in a service arrangement

18 January 2018 Production Resource Group[TS-626-AAR-2017]

18 Mumbai Tribunal upholds the deductibility of sales promotion expenditure incurred by a pharma company

24 January 2018 Solvay Pharma India Ltd. v. CIT [ITA No. 3585/Mum/2016]

19 Deadline for CbCR Intimation by a constituent entity resident in India, of an international group, the parent entity of which is not resident in India : 31 January 2018

24 January 2018

20 Hyderabad Tribunal rules withholding tax liability on actual sale consideration, rejects taxpayer’s plea of non-discrimination application on withholding provisions

31 January 2018 Bhagwandas Nagla v. ITO [TS-32-ITAT-2018]

21 CBDT releases FAQs on the new taxation regime for capital gains on transfer of equity shares and other securities

05 February 2018 CBDT Press release and clarifications F. No. 370149/20/2018-TPL dated 04 February 2018

22 Ahmedabad Tribunal rules on capital gains on call options and transfer pricing aspects

07 February 2018 Vodafone India Services [2018] 89 taxmann.com 299 (Ahmedabad - Trib.)

23 CBDT issues instruction for non-recovery of tax demands from ‘start-up’ companies issuing shares at premium value

08 February 2018 Instruction no F.No. 173/14/2018-ITA.I dated 6 February 2018

57 Tax Digest

24 Indian Government approves signing of Protocol to amend India-China DTAA

08 February 2018 Press release dated 07 February 2018

25 Global Tax Alert - Indian tribunal holds AMP expenses part of transaction value declared for customs purposes

27 February 2018 Ruling of the Delhi Customs Excise and Service tax Appellate Tribunal

26 CBDT notifies “Centralised Communication Scheme, 2018” for issuance of e-notices and verification of information

27 February 2018 CBDT Notification No. 12 of 2018 dated 22 February 2018

27 PAS Alert: Finance bill proposes to tax long term gains arising on sale of listed equity shares - Impact on employee stock option plans

27 February 2018 Finance Bill 2018 presented in Parliament

28 Mumbai Tribunal rules on interpretation of the phrase “beneficially held”; allows carry forward of losses when 51% voting power beneficially held by the same set of individuals

28 February 2018 Wadhwa & Associates Realtors Pvt. Ltd. v. ACIT[TS-82-ITAT-2018]

58 Tax Digest

Sl. No. Title Date of the alert Citation/Notification/Circular

1 Ministry of Commerce and Industry releases proposed amendments to the Special Economic Zone Rules, 2006 and invites suggestions

14 December 2017

Proposed amendments to SEZ Rules 2006 released on 08 December 2017

2 Revised Foreign Trade Policy 2015-20 released by the Ministry of Commerce and Industry

15 December 2017

Revised FTP 2015-20 released on 05 December 2017.

3 The GST Council recommends implementation of inter-state e-way bill system from 01 February 2018

18 December 2017

24th meeting of the GST council held on 16 December 2017

4 Government clarifies on GST rate for food & beverages provided by hostel mess in educational institution (Jan 2018)

10 January 2018 Circular No 28/02/2018 dated 08 January 2018

5 GST Council recommends tax rate rationalization and policy changes

20 January 2018 25th meeting of the GST council held on 18 January 2018

6 Writ petitions filed before different high courts in the GST regime

31 January 2018 Outcome of writ petitions filed before different high courts since the introduction of GST

7 Supreme Court rules use of pesticides in pest control treatment constitutes a deemed sale and attracts VAT

08 February 2018 2018-VIL-02-SC

8 Supreme Court upholds right of the buyer to claim ITC in spite of non-payment of tax by the selling dealer

08 February 2018 2018-TIOL-11-SC-VAT

9 CBEC empowers Superintendents of Central tax and prescribes internal monetary limits for adjudication of cases under GST

19 February 2018 Circular No. 31/05/2018 – GST dated 09 February 2018

10 Supreme Court rules value of free of cost supplies not includible in gross amount charged for levying Service tax

22 February 2018 Commissioner of Service tax v. Bhayana Builders (P) Ltd.[TS-47-SC-2018-ST]

11 OECD publishes guidance on mechanism for effective collection of VAT/GST on services and intangibles supplied by foreign suppliers

22 February 2018 OECD Guidance Report

12 High Court rejects utilization of accumulated credit of Education Cess and Secondary and Higher Education Cess for the payment of Service tax

23 February 2018 Cellular Operators Association of India v. Union of India and another[TS-44-HC-2018(DEL)-EXC]

Indirect Tax

59 Tax Digest

13 CBEC issues directions on recovery of inadmissible transitional credit with interest and penalty

28 February 2018 CBEC Circular No. 33/07/2018-GST dated 23 February 2018

14 CBEC lists orders of the courts attaining finality and issues directions for early disposal of similar cases by the Department

7 March 2018 CBEC Circular No. 1063/2/2018-CX dated 16 February 2018

15 CBEC clarifies on the applicability of GST on service transactions between a Joint Venture and its members

7 March 2018 CBEC Circular No. 35/9/2018-GST dated 5 March 2018

16 CBEC issues clarification on classification of certain activities as goods or services under GST

8 March 2018 CBEC Circular No. 34/8/2018-GST dated 1 March 2018

17 GST Alert - GST Council recommends implementation of e-way bill, extension of tax exemptions for exporters and continuation of the current compliance mechanism

12 March 2018 26th meeting of the GST Council on 10 March 2018

60 Tax Digest

Regulatory

Sl. No. Title Date of the alert Citation/Notification/Circular

1. IRDA prescribes guidelines for operations in the International Financial Services Centre of Indian and Foreign Insurers/ Re insurers

29 December 2017 Guidelines Reference No. IRDA/RI/GDL/SEZ/269/12/2017, dated 21 December 2017

2. Government of India liberalizes the foreign direct investment (FDI) policy in key sectors

11 January 2018 Union Cabinet meeting dated 10 January 2018

61 Tax Digest

Finance Bill 2018

The Finance Bill 2018 was presented by the Finance Minister on 1 February 2018. Download the key highlights by clicking here.

Read insightful articles in our Budget special issue of the India Tax Insights magazine. Download your copy by clicking here.

Alert dated 14 March 2018 released on key amendments at enactmentKey amendments at enactment stage of Finance Bill, 2018

Also visit EY Budget Connect 2018 webpage

Budget updates

Links to our various sector wise alerts released on 1 February 2018

• Media & Entertainment• Technology & Start-ups• Real Estate• Infrastructure• Financial services• Oil & Gas• Life Sciences• Automobile• Telecom• Logistics

• Consumer Products & Retail

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