Tax DigestQuarterly newsletterJune 2018

2 Tax Digest

Dear readers,

We are pleased to present the June 2018 edition of EYs quarterly newsletter, Tax Digest, which summarizes significant tax and regulatory developments during the April-June 2018 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 published articles on various issues in 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

Editorial

ContentsDirect tax

Verdicts

Significant Supreme Court (SC) rulings

SC upholds the principle of mutuality in case of transactions between members and co-operative societies.

SC rules that amendment to disallowance provision to be clarificatory and retrospective in nature.

SC rules that exclusions from export turnover also to be reduced from total turnover in computing tax holiday benefit.

SC rules retrospective amendment nullifying a judicial decision to be illegal.

SC rules waiver of loan is not taxable as business income.

SC rules Stock Appreciation Rights (SARs) benefit received prior to tax year 1999-2000 to not be taxable as perquisite.

Rulings on allowance of expenses incurred on exempt income

SC rules on disallowance of expenditure in relation to exempt dividend income from shares held as strategic investment and stock-in-trade.

Click to navigate

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Amritsar Tribunal upholds disallowance of expenditure despite absence of exempt dividend income during the tax year.

Rulings on profit-linked incentives

SC upholds that ICDs are inland ports eligible for infrastructure tax holiday benefit.

Pune Tribunal grants profit-linked deduction on infrastructure development to partnership firm where all partners are companies.

Other significant decisions

Mumbai Tribunal rules on interpretation of the phrase beneficially held, allows set-off of losses when 51% voting power beneficially held by the same set of individuals.

Bangalore Tribunal allows claim of losses in e-commerce business model, denies notional taxation as capital expenditure towards marketing intangibles.

Is there a permanent establishment (PE)?

Independent agent criteria to be seen from agents perspective, Agent working for multiple principals does not constitute NRs dependent agent PE (DAPE) in India even if it is sole agent of the NR.

Vessel engaged in seismic survey in High seas for oil exploration constitute fixed place PE.

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

Some key issues where Special Leave Petition (SLPs) were admitted by SC

From the Tax Gatherers desk

India proposes changes to Advance Ruling forms for implementing BEPS Action 5 on tax-ruling exchanges

CBDT directs Tax Authority to mandatorily process tax returns online for cases of scrutiny assessments

CBDT notifies ITR forms for tax year 2017-18

Government of India notifies revised procedure for availing tax benefits for start-ups

Treaty updates

Tax Treaty between India and Hong Kong signed

Protocol amending the tax treaty between India and Kazakhstan notified

Revised tax treaty between India and Kenya notified

Protocol amending the tax treaty between India and Kuwait notified

Happenings across the border

United Nations (UN) releases 2017 edition of Model Convention and its updated commentary

OECD BEPS update

On digital economy

OECD releases interim report on the tax challenges arising from digitalization

European Commission issues proposals for taxation of digitalized activity

On transfer pricing

OECD considers revising TP-guidelines on TP dispute resolution and intra-group services

OECD published additional Transfer Pricing (TP) Country Profiles, including India

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Other BEPS updates

OECD releases additional guidance on attribution of profits to PE under BEPS Action 7

BEPS Multilateral Instrument (MLI) will enter into force on 1 July 2018 for first five jurisdictions

OECD issued new mandatory disclosure rules for addressing Common Reporting Standard (CRS) Avoidance

Indirect tax

Case laws

Customs duty

High Court, Madras

Payment of differential duty during investigation amounts to admitting allegation of mis-declaration of value which attracts penalty

Foreign trade policy (FTP)

High Court , Delhi

Notification intending to limit the benefit of incentives must specify the same expressly

Central Excise

Tribunal, Chennai

Denial of exemption on account of erroneous interpretation of Notification is unsustainable

Tribunal, Mumbai

Rule 8 of Central Excise Valuation Rules will not be applicable where the transaction value for goods cleared for home consumption is available

CENVAT credit

Tribunal, Mumbai

Availment of CENVAT credit on inputs directly supplied at the site of manufacture cannot be denied

Reversal of CENVAT credit unwarranted on removal of inputs on payment of excise duty even though the activity amounts to trading

Tribunal, New Delhi

CENVAT credit availed in respect of input services cannot be disallowed unless it is ineligible

Service tax

Tribunal, Chennai

Activities incidental to the supply of ready mix concrete will not qualify as service to attract tax

Tribunal, New Delhi

Denial of refund to SEZ unit by placing reliance on Notification issued under Finance Act, 1994 is unsustainable

Value Added Tax/Central Sales Tax

High Court, Chhattisgarh

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Sales tax authorities are required to issue C-Forms in GST regime also except where the registration is cancelled under due process of law

Key statutory updates

Regulatory

Foreign Exchange Management Act (FEMA) 1999

RBI enhanced the limit for foreign portfolio investors (FPI) investment in corporate bonds

RBI revises norms for investment by FPI in debt securities

RBI liberalizes the norms applicable on external commercial borrowings (ECBs)

RBI introduced monitoring system in respect of foreign investment limits in listed Indian companies

Introduction of daily reporting of liberalized remittance scheme (LRS) transactions for resident individuals

RBI issues the revised regulation in respect of acquisition and transfer of immovable property in India

RBI issues cross border merger regulations

RBI revises the directions on Hedging of commodity price risk and freight risk in overseas markets

Foreign direct investment (FDI) policy

Minimum capital requirements for foreign investment in other financial services which are not regulated by any financial sector regulator

In the press

Compilation of alerts

Direct tax

Indirect tax

Regulatory

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Whats new Useful links

(Click to navigate)

DigiGST (EY GSP-ASP solution)

All about GST in India

Tax Technology

Economy Watch

Digital Tax Symposium

www.ey.com

India Tax Insights magazine Issue 13

Tax Library

Union Budget Connect 2018-19

EY India Tax Insights App - Download from

Google Play Store and Apple App Store

Recent webcasts

Follow us on Social Media:Tax Insights LinkedIn Group | Indian Tax Insights Blog

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Verdicts!

Significant Supreme Court (SC) rulingsSC upholds the principle of mutuality in case of transactions between members and co-operative societies

In the case of Venkatesh Premises Cooperative Society Ltd.1 (Taxpayer or Society), the issue before the SC was whether the receipt of transfer charges, non-occupancy charges and premium received for allotment of occupancy rights in additional construction of the Societys property, from the members of the Society can be regarded as not taxable on the principle of mutuality. According to the principle of mutuality, no one can derive any income from themselves and no income accrues when a common group of persons contributes to and participates in a common fund with an expectation that the amount would be spent for a common good or on objectives that will benefit all the contributors.

In the present case, the Taxpayer had received: (a) Part of transfer charges from incoming members (transferee) on transfer of premises/flat by outgoing members (b) Non-occupancy charges from members for premises that are not self-occupied but let out on rent and (c) Premium on sale of additional construction rights to members of the Societys property.

The SC ruled in favor of taxpayer and held that all receipts are covered by the principle of mutuality and, hence, the same are not taxable. On transfer charges, it was ruled that the moment a transferee is inducted as a member, the principle of mutuality is applicable as the amount can be appropriated only after transferee has become a member and in the event of non-admission, the amount is returned. On non-occupancy charges and premium received by the Society from its members on allotment of occupancy rights, it was ruled that these receipts have been used for the mutual benefit toward maintenance of the premises and provision of common amenities which ultimately endures to the enjoyment, benefit and safety of

the members and accordingly, the principle of mutuality was applicable.

(For further details, please click here for our alert dated 19 March 2018)

SC rules that amendment to disallowance provision to be clarificatory and retrospective in nature

In the case of Calcutta Export Company2 (Taxpayer), the issue before SC was whether the amendment by Finance Act, 2010 (2010 Amendment) to a specific disallowance provision3 of the Income Tax Laws (ITL) was retrospective in nature. This 2010 amendment provided that no disallowance would be made where the tax on such payments was withheld and deposited before the due date for filing return of income. Prior to the 2010 amendment, the disallowance provision provided for disallowance of specified expenses on which tax is deductible at source, but such tax has not been deducted or, after deduction has not been paid on or before its prescribed due date of payment. Thus, for the limited purpose of expense deduction, this amendment granted extended time to deposit tax collected with the Government of India (GoI).

The SC held that the 2010 amendment, which was inserted to remedy unintended consequences and to make the provision workable, is retrospective in operation. The SC further held that the 2010 Amendment should be interpreted liberally and equitably so that a taxpayer should not suffer unintended and deleterious consequences beyond the object and purpose of the provision.

(For further details, please click here for our alert dated 4 May 2018)

SC rules that exclusions from export turnover also to be reduced from total turnover in computing tax holiday benefit

In the case of HCL Technologies Ltd.4 (Taxpayer), the issue before the SC was whether for determining the export profits for tax holiday provision5 under the ITL, any

Direct tax

1 [TS-111-SC-2018-SC] 2 [TS-221-SC-2018]3 Section 40(a)(ia) of Income tax act 1961, which provides, that the payments on which the tax was deductible at source but was not deducted or after deducting the same, it is not paid to government on or before the prescribed due date, then such payment shall be disallowed as per the provision of this section in computation of business income.4 TS-218-SC-20185 Section 10A of the Income tax act, 1961

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recovery or reimbursements towards specified expenses which are excluded from the export turnover base are also to be excluded from the total turnover base in the normative formula. The SC was concerned with the tax holiday provision for export profits where the definition of export turnover (numerator in the normative formula) provided for exclusion of recovery of certain expenses, while there was no definition of the total turnover (denominator in the normative formula) in the provision.

The SC held that when the object of the normative formula is to arrive at the profits from export business, recovery of expenses excluded from export turnover are also to be excluded from the total turnover, as one of the components of the total turnover is the export turnover and any other view may make the formula unworkable and absurd.

(For further details, please click here for our alert dated 4 May 2018)

SC rules retrospective amendment nullifying a judicial decision to be illegal

In the case of the Karnataka Pawn Brokers Assn. & Ors (Respondent)6, the issue before the SC was regarding the validity of retrospective amendment in the state laws prohibiting interest payment by the state government on security deposits made by money lenders/pawn brokers in order to obtain a license to carry on the business of money lending or pawn broking. Earlier, Karnataka High Court (HC) in the case Manakchand Motilal7, had ruled that the money lenders/pawn brokers were entitled to interest on the security deposits and in that point in time, the laws neither provided for any prohibition of interest nor did it provide for payment of interest. However, in 1998, the State of Karnataka amended the respective laws prohibiting interest payment, with retrospective effect from 1985.

The SC observed that the Legislature has the power to introduce validating laws including the power to amend the laws with retrospective effect. However, retrospective amendment can be made to correct the mistakes or lacuna pointed out in the law by court in a judicial pronouncement. If the amendment in law is brought in to remove the

mistakes committed or lacuna in the earlier law, the amendment has the effect to correct the basis on which the court ruling was decided and hence, the amendment would not amount to overruling of the courts decision by the Legislature. If however, the object is not to make corrections or remove anomalies in earlier law but to bring in new provisions which did not exist earlier, the Legislature cannot, by amending the law, invalidate the judgments which have been pronounced earlier. The state government in this case had made an attempt to nullify the decision of the Karnataka HC in favor of the Respondent, which is a breach of the doctrine of separation of powers as enunciated by the Constitution of India. Therefore, the amendment made by the Legislature in so far as they are retrospective, were held to be illegal.

SC rules waiver of loan is not taxable as business income

In the case of Mahindra and Mahindra Ltd.8 (Taxpayer), being the lead case in a batch of connected appeal matters, the issue before the SC was whether the taxability of waiver of the principal amount of loan can be treated as business income under the provisions of ITL. Under the ITL, the value of any benefit or perquisite arising from business or profession of taxpayer is taxable as business income. Further, the ITL also provides for claw back taxation of any benefit that accrues to the taxpayer on account of remission or cessation of a trading liability in respect of which deduction has been allowed in the past years . While in the lead Taxpayers case, the loan was used for acquiring capital assets, in another matter forming part of same batch of appeals, the loan was used for working capital purpose.

In this case the SC considered the facts of lead Taxpayer alone on the ground that the question of law is same in all the appeals and they would stand disposed of with a common judgement in lead Taxpayers case.

With regard to the facts of lead Taxpayer, where the waiver was in respect of a loan used for acquiring capital asset, the SC ruled that a benefit is taxable as business perquisite only when the benefit is received in a form other than that of money. Waiver of loan by the creditor results in

6 TS-114-SC-2018-IDT7 I.L.R. 1991 KAR 19288 Civil Appeal No. 6949-6950 of 2004

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the debtor having extra cash in its hands and hence, the amount of loan waived cannot be taxed as a business perquisite. Further, the SC also ruled that the benefit of waiver of loan is not taxable under the claw back provision since the said provision covers remission of trading liability alone, whereas the loan in this case represents a liability other than trading liability.

(For further details, please click here for our alert dated 4 May 2018)

SC rules Stock Appreciation Rights (SARs) benefit received prior to tax year 1999-2000 to not be taxable as perquisite

In the case of Bharat V. Patel9 (Taxpayer), the issue before the SC was on the taxation of the amount received by an employee on redemption of SARs, prior to tax year 1999-2000 during which the ITL did not contain a specific provision for taxing employee share-based rewards. Later, such provision to tax share-based rewards was introduced by virtue of the Finance Act, 1999 effective from tax year 1999-2000 onwards.

Since the provision for taxing employee share-based rewards was introduced effective from tax year 1999-2000 onwards, the SC ruled that the SARs received prior thereto could not be taxed as perquisite, either as part of salary income computation or as part of business income computation. The SC observed that although there was a Circular10 issued by Central Board of Direct Taxes (CBDT) which clarified that where an employer offers shares to its employees at a price lower than that offered to other shareholders/public, the difference between the two is taxable as perquisite, the same was not applicable in the present case since the taxpayer was allotted SARs, and not the shares. Furthermore, the SC also held that the amount received on redemption of SARs cannot be taxed as benefit or perquisite arising from the exercise of business or profession, since the applicability of the provision is confined to cases where there is any business or profession-related transaction involved and there was no such transaction involved in the taxpayers case as he was a salaried employee.

(For further details, please click here for our alert dated 27 April 2018)

Rulings on allowance of expenses incurred on exempt incomeSC rules on disallowance of expenditure in relation to exempt dividend income from shares held as strategic investment and stock-in-trade

In the case of Maxopp Investment Ltd.11 (Taxpayer), the issue before the SC was on the disallowance of expenditure incurred in relation to exempt income by way of dividend on shares held as trading assets and stock-in-trade under the specific provisions12 (Section) of the ITL.

The SC held that while construing the scope of the phrase in relation to employed in the Section, the dominant purpose for which the investment in shares is made by the Taxpayer is not relevant. Even if the dominant purpose of investing in shares is not to earn exempt dividend income, but to have controlling interest over the investee company or to earn profit from trading in shares, it will not preclude the applicability of the Section. The fact remains that dividend received is exempt from tax. The Section statutorily incorporates the principle of apportionment of expenses between exempt income and taxable income. Keeping this object of the Section in mind, if expenditure is incurred on earning dividend income, pro rata expenditure attributable to the dividend income has to be disallowed under the Section.

Nevertheless, the computation of disallowance may depend upon the facts of each case. In case of taxpayer holding shares as stock-in-trade where dividend income is earned incidentally or by quirk of fate, the disallowance can be NIL. In all cases, before applying the theory of apportionment, the Tax Authority needs to record satisfaction that, having regard to the facts of the case, suo-moto disallowance made by the Taxpayer is not correct. While recording such satisfaction, the Tax

9 TS-204-SC-201810 Circular No. 710 dated 24 July 199511 [(2018) 91 taxmann.com 154 (SC)]12 Section 14A of Income tax act 1961 which provides that no deduction shall be allowed in respect of expenditure incurred by the taxpayer in relation to income which does not

form part of the total income under this Act.

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Authority has to examine the nature of loan taken by the Taxpayer for purchasing/making investment in the shares.

(For further details, please click here for our alert dated 16 March 2018)

Amritsar Tribunal upholds disallowance of expenditure despite absence of exempt dividend income during the tax year

IIn the case of Lally Motors India (P) Ltd.13 (Taxpayer), the issue before the Amritsar Tribunal was whether disallowance of expenditure under specific provision of ITL is warranted for expenditure incurred on shares but no exempt dividend income is actually earned.

Tribunal referred to a Circular14 issued by the CBDT15 which took the view that the said provision would apply even if no exempt income is earned during the relevant tax year. The Tribunal held that the said Circular has not been set aside or stayed by any HC and hence it was binding upon the Tax Authority in absence of any jurisdictional HC ruling taking a view contrary to the Circular. Furthermore, it also held that the Circular is in accordance with the said provision which triggers once the expenditure relating to exempt dividend has been incurred. It is immaterial if the exempt income has actually materialized or not. Thus, the applicability of the said provision does not hinge upon actual earning of the tax exempt income. For this proposition, the Tribunal relied on SC ruling in the case of Rajendra Prasad Moody16.

Rulings on profit-linked incentivesSC upholds that ICDs are inland ports eligible for infrastructure tax holiday benefit

In the case of CIT v. Container Corporation of India Ltd.17 (Taxpayer), the issue before SC was whether the taxpayer was eligible to profit-linked tax holiday in respect of the business of setting up and operating Inland Container Depots (ICDs). Under the specific provision18 of the ITL, the profit-linked tax holiday is available to a taxpayer undertaking the activity of development or operation and

maintenance or development, operation and maintenance of an eligible infrastructure facility. The definition of infrastructure facility includes a port.

The SC held that the Taxpayer was entitled to a profit-linked tax holiday in respect of the business of setting up and operating ICDs, since the CBDT had notified ICDs as eligible infrastructure facilities by way of a notification19 in 1998 and hence, it shall qualify as an infrastructure facility under the tax holiday provision of the ITL. Further, though there was an amendment withdrawing the CBDTs powers, from tax year 2001-02, to notify any public facility as infrastructure facility, the CBDT had clarified subsequently that activity or places notified as infrastructure facilities on or before 31 March 2001 would continue to enjoy the benefit even post 31 March 2001.

Hence, the SC held that Taxpayer shall be entitled to a profit-linked tax holiday under the specific provision of the Act for the business of setting up and operating ICDs.

(For further details, please click here for our alert dated 3 May 2018)

Pune Tribunal grants profit-linked deduction on infrastructure development to partnership firm where all partners are companies

In case of Rohan & Rajdeep Infrastructure20 (Taxpayer), the issue before the Pune Tribunal (Tribunal) was related to the eligibility of a partnership firm, having three corporates as partners, to avail the benefit of profit-linked deduction under a specific provision21 as applicable to infrastructure development under provisions of the ITL. The said provision under the ITL provides profit-linked deduction to an enterprise carrying on the business of developing or operating and maintaining or developing, operating and maintaining any infrastructure facility on fulfilment of certain conditions, one of which was that the enterprise must be a company or a consortium of companies or a body established under any central or state statute.

The Tax Authority denied benefit of deduction on the grounds that the Taxpayer is a firm and not a company or consortium of companies to be eligible for deduction.

13 Lally Motors India (P) Ltd. v. PCIT [ITA No. 218(Asr)/ 2017]14 Circular No. 5/ 2014 dated 11 February 201415 An apex direct tax administrative body in India.16 [(1978) 115 ITR 519 (SC)]17 TS-219-SC-201818 Section 80-IA of the Income tax act, 1961.19 Notification No. S.O. 744(E) dated 1 September 199820 [TS-118-ITAT-2018(PUN)]21 Section 80-IA of Income tax act, 1961

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Having regard to general parlance meaning of the term consortium as an agreement, combination, or group (as of companies), the Tribunal held that a firm where all partners are companies, constitutes a consortium of companies eligible for deduction under the provisions of the ITL.

Hence, the Tribunal allowed the claim of deduction under the said provision to the Taxpayer.

Other significant decisionsMumbai Tribunal rules on interpretation of the phrase beneficially held, allows set-off of losses when 51% voting power beneficially held by the same set of individuals

In the case of Wadhwa & Associates Realtors Pvt. Ltd22. (Taxpayer), the issue before the Mumbai Tribunal was on the set-off of losses of earlier years against taxable income when 51% of the voting power of the Taxpayer was beneficially held by the same persons during the year of loss as well as the tax year under consideration. A specific provision23 under the ITL provides for a limitation on set-off of losses of earlier years from the current years income when there is a change in the shareholding of taxpayers such that 51% of the voting power is not beneficially held by the same set of shareholders that were holding such voting power at the end of the year in which the losses were incurred.

In the facts of the case, two individual promoters held more than 50% indirect beneficial voting power in the Taxpayer through intermediate companies during the years of incurrence of losses and thereafter, in the year under consideration, the promoters became direct shareholders by acquiring 100% shares in the Taxpayer.

The Tribunal allowed the set-off of losses from the current years income by stating that said provision refers to beneficial holding with voting power and not to direct ownership of shares. Therefore, it covers indirect control of voting rights through a chain of holding in the same group. The Tribunal held that there was no change in the

beneficial voting power in the Taxpayer, which continued to remain with the promoters in the years of both, incurrence of loss as well as the claim of set-off. Hence, the limitation under the said provision is not attracted and set-off of losses has to be allowed to the taxpayer. To reach on its conclusion, the Tribunal placed reliance on the Karnataka HC decision in the case of Amco Power Systems Ltd24.

(For further details, please click here for our alert dated 28 February 2018)

Bangalore Tribunal allows claim of losses in e-commerce business model, denies notional taxation as capital expenditure towards marketing intangibles

In the case of Flipkart India25 (Taxpayer), a wholesale trader, the Taxpayer acquired goods from unrelated parties and sold them to third party retail sellers at a price lower than the purchase cost, thereby incurring huge losses during the year. The issue before the Bangalore Tribunal was whether the loss incurred by the Taxpayer on account of selling goods to third party retail sellers at a price lower than the purchase cost, can be denied on the ground that it is in the nature of capital expenditure incurred to create market intangible, i.e., goodwill/brand as held by the Tax Authority.

Taking note of various decisions of the SC and HC, the Tribunal held that the tax authority cannot ignore the actual sale price of goods and re-compute income based on the notional market price, even if a trader has sold its goods at a price lesser than the market price, i.e., it cannot bring to tax an income which is not earned by the Taxpayer, unless there is a specific provision in the ITL in this regard. The Tribunal also held that the expenditure incurred by the Taxpayer in favor of an unrelated party cannot be disallowed and the expediency of the business decision cannot be questioned. The Tribunal further denied the tax authoritys contention of considering profit foregone as capital expenditure incurred to create a marketing intangible based on mere presumption, when there was no actual accrual of liability or outflow of payment for such acquisition. The Tribunal, therefore, upheld the loss returned by the Taxpayer and held that re- computation of income by the tax authority was bad in law.

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22 TS-82-ITAT-201823 Section 79 of Income tax act, 196124 [(2015) 379 ITR 375]25 [TS-209-ITAT-2018(Bang)]

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Tax Digest12

Is there a PE? Independent agent criteria to be seen from agents perspective, agent working for multiple principals does not constitute NRs dependent agent PE (DAPE) in India even if it is sole agent of the NR

In case of ADIT (IT) v. Bay Line (Mauritius) (TS-73-ITAT-2018(Mum)), the Taxpayer, a Mauritius company, earned income from activities of its sole agent in India. However, such agent did not work exclusively only for the Taxpayer. The agent also worked on behalf of other principals and earned substantial part of its income from them. The Tax Authority contended that the Taxpayer has a DAPE in India.

The issue raised before the Tribunal was whether the presence of sole agent of the Taxpayer in India leads to creation of DAPE of the Taxpayer in India under India-Mauritius Double Taxation Avoidance Agreement (DTAA/tax treaty).

The Tribunal observed that dictionary meaning of the term exclusively suggests that the agent should earn 100% or something near to 100% from the principal so as to be regarded as a dependent agent. The Tribunal noted that, in present case, the activities of the agent were not devoted exclusively or almost exclusively on behalf of the Taxpayer as it also worked on behalf of other principals and earned a substantial part of its income therefrom.

The Tribunal stated that the fact that the principal has only one agent in India who undertakes all the activities for the principal is not relevant, since under provisions of the tax treaty, for determining the independence it is necessary to determine whether the agent has only one principal for whom the agent works exclusively.

Further, the Tribunal held that the sole agent of the Taxpayer in India is an agent of independent status and acts for the Taxpayer in the ordinary course of its business. Thus, it was held that the sole agent does not create DAPE for the Taxpayer under provisions of the tax treaty.

Vessel engaged in seismic survey in High seas for oil exploration constitute fixed place PE

In case of SeaBird Exploration FZ LLC, In re. (2018) (AAR No. 1295/2012), the applicant, a UAE company, entered into an agreement with ONGC, an Indian entity, for rendering services of seismic data acquisition, processing and interpretation in Mumbai High Sea which would help in oil and gas exploration. These services were rendered through seismic survey vessels which were mobilized in India for 113 days.

The applicant filed for an advance ruling and contended before the Authority for Advance Rulings (AAR) that the service PE clause of the India-UAE tax treaty requires a presence of nine months and since the applicant rendered services in India only for 113 days, it did not form a PE in India. Accordingly, the income under the agreement was not taxable in India.

The AAR negated the contention of the applicant and held that the service PE clause was not applicable in the current scenario since service PE clause applies to activities/ services rendered through employees or other personnel. In the Applicants case, the services of seismic surveys are conducted on the high seas through the seismic vessels which are equipped with various equipment for collection and interpretation of data. The services are not carried on by employees/personnel but performed primarily by the vessels and equipment mounted thereon and deployed in the ocean.

The AAR observed that the activities in connection with exploration, exploitation or extraction of mineral oil, etc. are not explicitly included under the PE definition of India-UAE tax treaty as compared to other tax treaties such as the India-Singapore tax treaty which specifically provides for same. Thus, the AAR held that in absence of any specific provision in relation to the activities in connection with exploration or connected activities, the relevant provision to apply is fixed PE. Question of specific provision overriding general provision for PE determination did not arise.

Further, the AAR held that the vessels used by the applicant passed all three tests for constituting fixed place PE, namely permanence test, business test and disposal test. Even though the taxpayer was present in India only for 113 days, the AAR concluded that there is permanence of duration to the extent that is required by the applicants business26. Accordingly, the applicant had fixed place PE in India and the income earned under the agreement with ONGC was taxable in India.

26 The ruling does not reason out in detail how permanence test, business test and disposal test was met in the Applicants case.

13 Tax Digest

Name of taxpayer and citation of decision

Description of payment

Ruling

Independent News Service (P.) Ltd. v.. ITO (2018) (90 taxmann.com 163) (Del.Trib.)27

India-US tax treaty

Payment for use of transponder capacity of satellite for broadcasting news

The Taxpayer (an Indian company) entered into an agreement with a US Company (FCo) for use of transponder capacity of the satellite for broadcasting news channel through medium of television (TV). Under the agreement, the Taxpayer was required to pay transponder charges to FCo on monthly basis.

The Taxpayer did not withhold taxes on payment made to FCo on the grounds that such payments neither qualify as royalty nor FTS.

On the other hand, the tax authority contended that the transponder charges paid amount to FCo constitutes royalty under provisions of the ITL as well as under India-US tax treaty since it was use of a process as defined under the ITL28. Hence, the taxpayer was required to withhold taxes on such payments.

The Delhi Tribunal held that the transponder charges are paid for use of facility. These charges did not result from use or right to use of any industrial, commercial or scientific equipment and also did not result in use of copyright or like articles. Hence, such payments do not qualify as royalty under India- US tax treaty.

Further, the Tribunal relied on decision of Delhi HC in case of New Skies Satellite BV & Ors.29 and held that unilateral amendments to the ITL cannot be extended to the meaning of any term under a tax treaty. The ITL was retrospectively amended by the Finance Act 2012 where in a broad meaning of the term process was introduced in the definition of royalty expanding its scope under ITL. The Tribunal held that such amendment cannot be read into the definition of term royalty in the tax treaties.

Since the transponder charges did not qualify as royalty and in absence of PE of FCo in India, the payment made to FCo was not taxable in India and the Taxpayer was not required to withhold taxes on such payment made to FCo.

McKinsey Knowledge Centre India (P.) Ltd. v. ITO (2018) (ITA No. 407/Del/2013) (Del. Trib.)

India- Singapore tax treaty

Subscription fees paid for access of database

The Taxpayer, an Indian company, entered into an agreement with a Singaporean company (FCo) for accessing the database maintained by FCo.

The Taxpayer did not withhold taxes on payment made to FCo on the ground that such payments were not taxable in India.

However, the Tax Authority contended such payment was is in nature of royalty since it amounted to use of intellectual property rights under provisions of the ITL under the India-Singapore tax treaty.

The Delhi Tribunal held that such payment did not qualify as royalty under ITL as well as under India-Singapore tax treaty on the following grounds:

FCo merely provided access to a database which was a compilation of general information. FCo had not generated the information out of its own experience and it was neither its secret or divulged information.

The Taxpayer could not exploit the database commercially and had also not received any knowledge on maintaining databases.

It amounted to payment was towards use of copyrighted material rather than for the use of copyright.

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

27 In the case of United Home Entertainment Pvt. Ltd. v. DCIT(IT) (2018) (52 CCH 98) (Mum.), Mumbai Tribunal has recently ruled on similar issue of payment for use of tran-sponder capacity in context of India UK tax treaty.

28 Under Explanation 6 to S. 9(1)(vi), the term process is defined as under: the expression process includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret

29 (2016) 382 ITR 114

14 Tax Digest

Name of taxpayer and citation of decision

Description of payment

Ruling

ACIT v. Areva T&D India Ltd. (TS-149-ITAT-2018(CHNY))

India-Netherlands tax treaty

Testing fees paid for testing manufactured products

The Taxpayer, an Indian company, paid testing charges to a Dutch company (FCo) for testing the transformers manufactured by the Taxpayer in India. The Taxpayer did not withhold taxes on testing fees paid to FCo on the grounds that such fees was not taxable in India.

However, the Tax Authority contended that these testing charges are in nature of FTS and hence were taxable in India. Accordingly, the Taxpayer defaulted in withholding taxes on payment made to FCo.

The Chennai Tribunal noted that FCo merely conducted tests on the products manufactured by the Taxpayer and it sent such test reports in India.

The Tribunal held that the knowledge of testing was not made available to the Taxpayer and hence, such testing charges did not fall within the definition of FTS under India-Netherlands tax treaty. Consequently, the Taxpayer is not required to withhold taxes at source on the payments made to F Co.

Godaddy.com LLC v. DIT (TS-157-ITAT-2018(Del))

ITL

Domain name registration fees

The Taxpayer, a US LLC, is an accredited domain name registrar authorized by Internet Corporation for Assigned Names and Numbers. During the relevant tax year, the Taxpayer earned web hosting charges and domain registration fees in India.

Web hosting charges are earned for providing services that enables an entity to upload its webpages on a server for public access over the internet.

Domain registration fees are earned for providing services of facilitating registration of a domain name, which identifies one or more IP address with a name that is easier to remember and use in URLs to identify particular web pages.

The Taxpayer, in its return of income, claimed that the web hosting charges were in nature of royalty and offered the same to tax in India. However, the domain registration charges was not offered to tax on the round that the same is not taxable under ITL. Further, since the Taxpayer was not a tax resident of USA, no benefit under India- USA tax treaty was claimed.

The Tax Authority contended that the domain registration charges qualified as royalty since it amounted to use of intangible asset similar to trademark and hence was taxable in India under ITL.

The Taxpayer filed an appeal before the Delhi Tribunal on taxation of domain registration charges.

The Delhi Tribunal held that the domain registration fee was in the nature of royalty under the ITL, on the following grounds:

Domain name is an intangible asset similar to trademark:

It is a valuable commercial right and a corporate asset

It is more than an internet address

It has all the characteristics of a trademark

Domain names are subject to legal norms applicable to trademark

Rendering of services for domain registration is rendering of services in connection with the use of an Intellectual Property which is similar to trademark.

15 Tax Digest

Citation Particulars HC rulingITC Ltd. (Taxpayer) [SLP No. 8434-8441/2018]

Taxpayer preferred an appeal against Delhi HCs order holding that royalty payment by the taxpayer for operating airport lounge shall be considered as rent liable for withholding under ITL

SC has admitted taxpayers SLP

Taxpayer was making payments to Airport Authority of India (AAI), one as royalty payments and another as license fee payments, Delhi HC ruled that royalty payment made by the taxpayer for operating airport lounge shall fall under the expanded definition of rent as per the specific withholding provision30 of ITL.

HC rejected the Taxpayer stand that fees for use of space alone could be categorized as rent and observed that the payment for the use of space is inseparable from the payment of royalty for the right to operate the lounge.

It also remarked that if there is a default in either of the payments, the inevitable consequence is that the taxpayer loses the right to operate the executive lounge.

It relied upon Delhi HC ruling in Apeejay Surrendra Park Hotels Ltd.31 and SC ruling in Japan Airlines32 wherein it was held that scope of definition of term rent is very wide and not restricted to what is understood in common parlance, but also includes payment for use of land or building under any other agreement or arrangement.

Krishak Bharti Cooperative Ltd.

[2018] 90 taxmann.com 121 (SC)

Revenue preferred an appeal against the Delhi HC order which allowed Foreign Tax Credit (FTC) under India-Oman tax treaty in respect taxes on dividend income, despite such income being exempt under Omani tax laws

SC has admitted taxpayers SLP

In case of Krishak Bharati Co-operative Ltd. [TS-160-HC-2017(DEL)], the Taxpayer, an Indian company, received dividend income from its investments in a company of Oman. Such dividend was not liable to pay any tax in Oman by virtue of specific exemption granted as per Omani tax laws. The taxpayer offered such dividend income to tax in India and claimed credit of taxes that would have been payable in Oman but for the exemption granted there.

Under the tax treaty between India and Oman, in order to claim credit of taxes, tax should have been payable in Oman if not for the tax incentives granted in Oman to promote economic development.

The Tax Authority was of view that the exemption granted by Oman cannot be treated as a tax incentive for economic development, as it existed across the board and was simply a feature of Omans tax law, which does not tax dividend income.

On appeal, the Delhi Tribunal, based on the clarifications issued by the Sultanate of Oman, held that the intent of dividend exemption was to promote Omani economic development and to encourage investment in Omani companies. The Tribunal made a remark that the interpretation of Omani tax laws can be clarified only by the highest tax authorities of Oman and such interpretation given by them must be adopted in India. Thus, the Tribunal ruled in the taxpayers favor and granted tax credit to the taxpayer.

Aggrieved, the Tax Authority appealed before the Delhi HC. Concurring with the Tribunals decision, the Delhi HC also took note of the clarifications issued by the Sultanate of Oman, assessment made under Omani laws and confirmed that the purpose of the exemption was to promote economic development. Accordingly, it held that the taxpayer was entitled to tax credit in respect of Omani taxes on dividend income, despite such income being exempt under Omani tax laws.

(For details, refer June 2017 edition of tax digest)

Some key issues where Special Leave Petition (SLPs) were admitted by SC

30 Section 194-I of Income tax act, 1961.31[TS-153-HC-2016(DEL)]32 [TS-436-SC-2015]

16 Tax Digest

India proposes changes to Advance Ruling forms for implementing BEPS Action 5 on tax-ruling exchanges

Action 5 of Base Erosion and Profit Shifting (BEPS) project by the Organisation for Economic Co-operation and Development (OECD) recommends compulsory spontaneous exchange of certain taxpayer-specific rulings that could give rise to BEPS concerns in the absence of such exchanges. Such exchange is required to be made not only with the countries of residence of all related parties with whom taxpayer enters into transaction but also with the country of residence of the immediate parent company and the ultimate parent company.

In order to implement the recommendations made under BEPS Action 5 to bring greater transparency in cross national transactions, the CBDT has issued a draft notification to modify the forms of application before the AAR under Indian Tax Laws. The amendments are proposed so that details such as name, address and country of the residence of non-residents immediate parent company or ultimate parent company are captured at application stage itself.

Source: CBDT notification no. 370142/34/2016-TPL (Part) dated 10 April 2018

CBDT directs Tax Authority to mandatorily process tax returns online for cases of scrutiny assessments

CBDT issued instruction directing Tax Authority to process on Income Tax Business Application (ITBA module) electronically all tax returns of tax year 2016-17 and onwards which were pushed by Centralised Processing Centre (CPC) to Tax Authority.

In order to move towards e-governance, the tax department has launched ITBA module in April 2017. ITBA module is an internal software developed by the tax department to conduct online scrutiny and communicate with the taxpayer without any human interface. ITBA module was launched in April 2017 and is functioning since 31 October 2017.

Vide order33 dated 28 March 2018, the CBDT has come out with instruction directing Tax authority to process all tax returns which were pushed by CPC to Tax Authority on ITBA.

Source: CBDT Instruction No. - F. No. 225/53/2018/ITA.II dated 28 March 2018

CBDT notifies ITR forms for tax year 2017-18

CBDT has brought in key amendments to the ITR forms for tax year 2017-18, vide Notification No. 16/2018 dated 3 April 2018 (Notification). The said Notification has also amended Rule 12 of the ITR, 1962 to restrict the scope of a simplified one-page ITR form to specified individual taxpayers, being ordinarily resident in India.

Some of the important changes are:

While verifying the tax return, the taxpayer is required to mention in whose capacity it is furnishing such tax return and also declare that it is competent to furnish the said tax return in that capacity.

In reporting details of tax withheld on income, the taxpayer is to provide break-up of credit claimed in the hands of the taxpayer, details of taxes withheld and claimed in the name of spouse governed by Portuguese Civil Code or any other person in respect of whom the declaration has been filed.

Non-resident taxpayers need to submit details of any one foreign bank account for the purpose of remitting tax refund due, if any.

The requirement of reporting of cash deposit into each bank account of the taxpayer during the demonetization period (9 Nov 2016 to 30 Dec 2016) has been omitted, as the same is not relevant for the current tax year.

In addition to details of capital gains not chargeable to tax as per the DTAA, the revised ITR now also requires to report the capital gains chargeable at special rates as per the tax treaty.

(For details refer EY Tax Alert dated 07 April 2018)

Source: Notification No. 16/2018 dated 3 April 2018

From the Tax Gatherers Desk

33 F. No. 225/53/2018/ITA.II

http://www.ey.com/Publication/vwLUAssets/CBDTreturnforms/$FILE/CBDTreturnforms.pdf

17 Tax Digest

GoI notifies revised procedure for availing tax benefits for start-ups

Changes have been made in the procedure for availing direct tax benefits for start-ups as notified by the Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industry of the GoI through Notification No. F. No. 5(4)2018-SI dated 11 April 2018 (2018 Notification).

While there is no change in the procedure for obtaining recognition as a start-up, for regulatory purposes, in supersession of an earlier Notification issued on 23 May 2017, the 2018 Notification prescribes Forms for making application to Inter-Ministerial Board of Certification (IMB) to avail tax benefits by way of profit-linked tax holiday for three years and exemption from angel tax34.

In relation to angel tax, the 2018 Notification prescribes additional conditions for seeking approval for exemption from angel tax for both start-up companies and investors. Such conditions did not exist prior to 2018 Notification for availing such exemption.

The additional conditions to be fulfilled by start-up companies include:

Cap of INR100m on post issue paid up share capital and share premium

Furnishing of valuation report by Category I Merchant banker specifying fair market value (FMV) of the shares in accordance with Rule 11UA of the Income Tax Rules 1962

The condition to be fulfilled by investor is either:

Average returned income of INR2.5m or more for preceding three financial years (FY) or

Net worth of INR20m or more on the last date of the preceding FY.

While applying for approval for exemption from angel tax, start-up companies shall be required to furnish copies of income tax returns and balance sheet of the investor along with the application. The 2018 Notification has come into effect from the date of its publication in the Official Gazette on 11 April 2018. While it will apply to issue of shares post 11 April 2018, its applicability to shares issued prior to 11 April 2018 is unclear.

The GoI has also issued a revised income tax Notification dated 24 May 2018 with retrospective effect from 11 April 2018 for availing exemption from angel tax provision (which, in turn, requires compliance with DIPP Notification) to align with requirements of 2018 DIPP Notification.

(For details refer EY Tax Alert dated 13 April 2018 and

Source: Notification No. F. No. 5(4)2018-SI dated 11 April 2018 of DIPP and Notification No. 24/2018 dated 24 May 2018

29h May 2018)

34 Popular acronym for provision in the Indian Income tax law which authorizes the Tax Authority to treat excess of issue price of shares to residents over the FMV of shares as determined in terms of the said provision as income of the closely held company which issues such shares.

http://www.ey.com/Publication/vwLUAssets/EY_FATCA_CRS/$FILE/EY_FATCA_CRS.pdf http://www.ey.com/Publication/vwLUAssets/angel_tax/$FILE/angel_tax.pdf

18 Tax Digest

Tax treaty between India and Hong Kong signed

On 19 March 2018, Hong Kong and India signed their first comprehensive income tax treaty. The Treaty might stimulate flow of investment, technology and personnel from Hong Kong to India and vice versa, prevent double taxation and provide for the exchange of information between the two countries. It may improve transparency in tax matters and help to curb tax evasion and tax avoidance.

Significant provisions in the tax treaty are:

Source country taxation rights on capital gains from the transfer of shares

Beneficial rate of taxation of dividends at the rate of 5% on the gross dividend and 10% on gross interest, royalties, FTS

Certain provisions are influenced by the OECDs Multilateral Instrument (MLI) on BEPS such as the principal purpose test (PPT), competent authority rule such as the tie-breaker test for dual resident entities, mutual agreement procedure provisions, corresponding adjustments in transfer pricing (TP) cases, among others

The benefit of provisions on dividends, interest, royalties, FTS, and capital gains has been made subject to the main or one of the main purposes test which is in addition to a general rule on the lines of the PPT of the MLI

Authority is given to anti-avoidance provisions under the domestic laws

(For details refer EY global alert dated 28 March 2018)

Protocol amending the tax treaty between India and Kazakhstan notified

A Protocol to amend the existing tax treaty between India and Kazakhstan (1996) was signed on 6 January 2017. The said Protocol has entered into force on 12 March 2018 and was notified in the official gazette on 12 April 2018.

Salient features of the Protocol are as under:

The Protocol provides internationally accepted standards for effective exchange of information on tax matters.

A Limitation of Benefits Article is inserted to provide a main purpose test to prevent misuse of the tax treaty and to allow application of domestic law and measures against tax avoidance or evasion.

A specific provision to facilitate relieving of economic double taxation in TP cases is inserted.

The Protocol replaces the existing Article on Assistance in Collection of Taxes with a new Article to align it with international standards.

Please click here for the source

Revised tax treaty between India and Kenya notified

The original tax treaty between India and Kenya was signed and notified in 1985. Subsequently, the tax treaty was renegotiated and a revised tax treaty was signed between both countries on 11 July 2016. This revised tax treaty has been notified in the Official Gazette on 19 February 2018.

Some of the key features of the revised tax treaty are highlighted as under:

In order to promote cross border flow of investments and technology, withholding tax rates are reduced from 15% to 10% on dividends, from 15% to 10% on interest, from 20% to 10% on royalties and from 17.5% to 10% on fees for management, professional and technical services.

A new Article on Limitation of Benefits is inserted to allow treaty benefits to bona fide residents of both countries, to combat treaty abuse by third country residents and to allow application of domestic law to prevent tax avoidance or evasion.

Article on Exchange of Information has been updated to the latest international standard to provide for exchange of information, including banking information for tax purposes, to the widest possible extent.

A new Article on Assistance in Collection of Taxes has also been provided in the revised treaty which will enable assistance in collection of tax revenue claims between both countries.

Source: PIB press release dated 22 February 2018

Treaty Updates

https://www.ey.com/gl/en/services/tax/international-tax/alert--hong-kong-and-india-sign-income-tax-treatyhttp://pib.nic.in/newsite/PrintRelease.aspx?relid=178675

19 Tax Digest

Protocol amending the tax treaty between India and Kuwait notified

A Protocol to amend the existing tax treaty between India and Kuwait (2006) was signed on 15 January 2017. The said Protocol has entered into force on 26 March 2018 and is notified in Official Gazette on 4 May 2018.

The Protocol updates the provisions in the tax treaty for exchange of information as per international standards. Further, the Protocol enables sharing of the information received from Kuwait for tax purposes with other law enforcement agencies with authorization of the competent authority of Kuwait and vice versa.

Source: CBDT Notification No. 21 of 2018 dated 4 May 2018

20 Tax Digest

United Nations (UN) releases 2017 edition of Model Convention and its updated commentary

On the occasion of sixteenth session of the Committee of Experts on International Cooperation in Tax Matters held on 14 to 17 May 2018, the UN released 2017 update of the UN Model Double Taxation Convention between Developed and Developing Countries (2017 UN MC). Prior to the 2017 update, the earlier version of UN Model Tax Convention was released in 2011.

Similar to the 2017 update to OECD Model Tax Convention released in November 2017, the 2017 UN MC contains the treaty-based recommendations developed through the BEPS project. Further, it also contains few other changes that were not developed as part of the work on BEPS. The key modifications in 2017 UN MC are as under:

A modified title of the Convention and a new preamble of the Convention emphasizing that treaties should not create opportunities for tax avoidance or evasion, including through treaty shopping.

New clauses are inserted in Article 1 (Persons covered) to grant treaty benefits to a fiscally transparent entity, and a new saving clause is inserted to clarify that residence taxation is generally preserved under tax treaties.

Article 4 (Resident) is modified to include a new tie breaker rule for determining the treaty residence of dual-resident persons other than individuals.

Article 5 (Permanent Establishment (PE)) is modified to prevent the avoidance of PE status.

Article 10 (Dividends) is modified to add condition of 365 day holding period to avail benefit of lower tax rate where beneficial owner directly owns shares above a 25% threshold.

A new Article 12A is inserted to provide for source taxation of fees for technical services.

A look back period has been inserted in Article 13(4) and Article 13(5) (Capital gains) for following: Taxation of indirect transfer of immovable property For taxation of gains from alienation of shares/

interest of an entity if the alienator directly or indirectly holds certain percent of the capital of that entity

Articles 23A and 23B is changed to clarify that there is no obligation to provide relief for tax imposed on solely residence basis.

A new Article 29 is included that contains provisions relating to entitlement to treaty benefits. These include a limitation on benefits rule, a third state permanent establishment rule and a general anti-abuse rule.

The recommendations in final report of BEPS Action 6 have been largely adopted in 2017 UN update. For instance, some significant changes include: A minimum holding period has been inserted in

Article 10 for concessional tax rate in respect of dividend income

A look back period has been inserted in Article 13(4) for taxation of indirect transfer of immovable property

A new Article 29 has been introduced to specifically to provide conditions for entitlement of treaty benefit, which introduces Principal Purpose Test (PPT) rule and detailed version of Limitation of Benefits (LOB) Rule

Commentary on Article 1 has been expanded along the lines of 2017 OECD MC to prevent improper use of tax treaty.

OECD BEPS updatesOn Digital economy

OECD releases interim report on the tax challenges arising from digitalization

On 16 March 2018, the OECD released Tax Challenges Arising from Digitalisation Interim Report 2018. The Interim Report is a follow-up to the work delivered by the OECD in October 2015 under Action 1 of the BEPS Project, which was focused on addressing the tax challenges of the digital economy.

The Interim Report provides an in-depth analysis of the main features commonly found in certain highly-digitalized business models and value creation in the digitalized age, but does not make any specific recommendations to countries. It reports that the BEPS Inclusive Framework members have agreed to undertake a coherent and concurrent review of the nexus and profit allocation rules and that the members will work towards a consensus-based solution.

Happenings across the border

21 Tax Digest

The Interim Report also provides an overview of unilateral measures that have been introduced by countries in this area. Further, the Interim Report discusses a framework that can be considered when designing interim measures to address the tax challenges of digitalization, as well as an outline of the possible long-term approaches to address these challenges.

The Interim Report notes that further work will need to be carried out to understand the various business models operated by enterprises offering digital goods and services. An update on this work will be provided in 2019, as the BEPS inclusive framework works towards a consensus-based solution by 2020.

Refer EY global alert dated 16 March 2018.

European Commission issues proposals for taxation of digitalized activity

On 21 March 2018, the European Commission issued two proposals for new Directives that will deliver new ways to tax digitalized forms of business activity. The Commissions proposals focus on a two-phased approach:

An interim solution, referred to as the Digital Services Tax (DST proposal)

A longer term Council Directive laying down rules relating to the corporate taxation of a significant digital presence (SDP proposal)

The DST proposal is for a gross revenues (i.e., turnover) tax, set at a uniform rate of 3% across all European Union (EU) Member States, while the SDP proposal focuses on a new concept of digital PE, along with revised profit attribution rules. The Commission notes that the SDP measures could eventually be integrated into the scope of the Common Consolidated Corporate Tax Base (CCCTB), but sets out no distinct interdependency between these two activities.

Both solutions would be delivered by new directives. The proposals will be submitted to the Council for adoption and to the European Parliament for consultation, and the Commission hopes that final adoption will occur by 31 December 2019, for 1 January 2020 transposition into national law.

Refer EY global alert dated 21 March 2018.

On transfer pricing OECD considers revising TP-guidelines on TP dispute resolution and intra-group services

The OECD is considering revisiting the OECD 2017 TP guidelines and requested for public comments in respect of following issues:

Chapter IV (administrative approaches to resolve TP disputes) - to reflect the latest developments on administrative procedures aimed at minimizing TP disputes and to help resolve them, increasing tax certainty for taxpayers and preventing double taxation and

Chapter VII (intra-group services) to discuss how the existing guidance could be revised or supplemented to address the issues related to the practical implementation of the TP guidelines in the context of intra-group services, thus increasing tax certainty for taxpayers and preventing double taxation

Please click here for the source.

OECD published additional TP Country Profiles, including India

On 9 April 2018, the OECD published additional TP Country Profiles for 14 countries reflecting the existing TP legislation and practices for each country namely, Australia, China, Estonia, France, Georgia, Hungary, India, Israel, Liechtenstein, Norway, Poland, Portugal, Sweden and Uruguay.

The profiles, prepared by means of questionnaires filled out by the countries, focus on the domestic legislative measures based on major TP issues including the TP methods, arms-length principle, TP documentation, comparability analysis, intangible property, intra-group services, cost contribution agreements, administrative approaches to avoiding and resolving disputes, safe harbors and other implementation measures. The TP Country Profiles also compared the countries domestic legislation with the OECD TP Guidelines to reflect the extent to which the countries are following the guidelines.

Refer EY global tax alert dated 23 April 2018.

https://www.ey.com/gl/en/services/tax/international-tax/alert--oecd-releases-interim-report-on-the-tax-challenges-arising-from-digitalizationhttps://www.ey.com/gl/en/services/tax/international-tax/alert--european-commission-issues-proposals-for-taxation-of-digitalized-activityhttp://www.oecd.org/tax/oecd-invites-public-comments-on-the-scope-of-future-revision-of-chapter-iv-and-chapter-vii-of-transfer-pricing-guidelines.htmhttp://www.ey.com/Publication/vwLUAssets/The_Latest_on_BEPS_-_23_April_2018/$FILE/2018G_02392-181Gbl_The%20Latest%20on%20BEPS%20-%2023%20April%202018.pdf

22 Tax Digest

Other BEPS updatesOECD releases additional guidance on attribution of profits to PE under BEPS Action 7 On 22 March 2018, the OECD released the final Additional Guidance on the Attribution of Profits to a Permanent Establishment, under the BEPS Action 7 final report (Preventing the Artificial Avoidance of Permanent Establishment Status).

The Report provides additional guidance on the attribution of profits to PEs resulting from the changes to Article 5 of the OECD Model Tax Convention (MTC) 2017, as outlined in the final report on BEPS Action 7. The Report sets out general principles for the attribution of profits to PEs resulting from the changes to Article 5 under BEPS Action 7. It also includes examples dealing with the attribution of profits to a PE relating to warehousing activities, commissionaire arrangements, an online advertising sales structure and procurement activities.

The key principle across the examples is that the profits attributable to a PE are those that the PE would have derived if it were a separate and independent enterprise. This principle, the Report says, applies regardless of whether a tax administration adopts the Authorised OECD Approach or any other approach used to attribute profits.

The Report was agreed by all members of the Inclusive Framework (IF) on BEPS and thus these principles are relevant and applicable in attributing profits to PEs to all IF members and not only to OECD member countries.

Refer EY global alert dated 28 March 2018.

BEPS MLI will enter into force on 1 July 2018 for first five jurisdictionsAccording to the text of MLI, for the first five MLI signatories who ratify the MLI, the MLI enters into force on the first day of the month following the expiration of a period of three calendar months from the date of deposit of the fifth instrument of ratification, acceptance or approval.

On 22 March 2018, Slovenia was the fifth jurisdiction to deposit its instrument of ratification, acceptance or approval of the MLI. Before Slovenia, Austria, the Isle of Man, Jersey and Poland had deposited their respective instrument with the OECD. This means that, for these five jurisdictions the MLI will enter into force on 1 July 2018.

For each signatory ratifying, accepting or approving the MLI after the deposit of the fifth instrument of ratification, acceptance or approval, 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 the deposit by such Signatory of its instrument of ratification, acceptance or approval.

Refer EY global alert dated 23 March 2018.

OECD issued new mandatory disclosure rules for addressing Common Reporting Standard (CRS) AvoidanceOn 9 March 2018, the OECD issued new mandatory disclosure rules for addressing CRS Avoidance Arrangements and Opaque Offshore Structures which is consistent with the concepts on mandatory disclosure articulated in the best practice recommendations contained in BEPS Action 12 final report on mandatory disclosure rules. The new model rules require lawyers, accountants, financial advisors, banks and other service providers to inform Tax Authority in certain circumstances when, for example, there is a CRS Avoidance Arrangement or Opaque Offshore Structure.

A CRS Avoidance Arrangement is defined as any arrangement for which it is reasonable to conclude that it is designed to circumvent or is marketed as, or has the effect of, circumventing CRS legislation or exploiting an absence thereof.

An Opaque Offshore Structure is defined as a Passive Offshore Vehicle (i.e., a Legal Person or Legal Arrangement that does not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises in the jurisdiction where it is established or is tax resident) that is held through an opaque structure.

In order for the new rules to meet their objective, it is necessary that a reliable exchange of information relationship is in place between the jurisdiction where the Intermediary makes the disclosure and the jurisdiction where the taxpayer is resident. The OECD is currently working on an exchange of information framework to be developed under the Multilateral Convention on Mutual Administrative Assistance, which will ensure that the relevant information reaches the jurisdiction of tax residence of the relevant taxpayer in a timely and structured manner.

Refer EY global alert dated 9 April 2018.

https://www.ey.com/gl/en/services/tax/international-tax/alert--oecd-releases-additional-guidance-on-attribution-of-profits-to-a-permanent-establishment-under-beps-action-7https://www.ey.com/gl/en/services/tax/international-tax/alert--beps-multilateral-convention-will-enter-into-force-on-1-july-2018-for-first-five-jurisdictionshttps://www.ey.com/gl/en/services/tax/international-tax/alert--the-latest-on-beps---9-april-2018

23 Tax Digest

High Court, Madras

Payment of differential duty during investigation amounts to admitting allegation of mis-declaration of value which attracts penalty

Customs Act, 1962; in favor of Revenue

The assessee, engaged in manufacture of automotive instruments and sensors imported goods during October 1989 to October 1994 along with design, drawing and technical information required for manufacture of finished goods. While clearing the goods, value of design, drawing and technical information was not included in the assessable value of imported goods.

Revenue issued a show cause notice (SCN) in May 1998 to the assessee by invoking the extended period of limitation on the ground of alleged suppression of facts and imposed differential duty along with penalty. Assessee filed appeal before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT/ Tribunal). While disposing the appeal, CESTAT deleted differential duty and reduced the penalty. Assessee filed further appeal before the Madras HC for the balance portion of the penalty.

The aassessee submitted that the error on valuation by it was not intentional. Further, it was contended that payment of duty during the investigation stage and before the issuance of SCN amounts to payment under protest. In support of its contention, the assessee relied on the SC judgment in the case of Mafatlal Industries Ltd. v. Union of India [1997 (89) ELT 247 (SC)]. The assessee further submitted that in view of waiving duty element, imposition of penalty does not arise.

Revenue submitted that even though CESTAT went against the Revenue on the issue of extended period of limitation, it has admitted the existence of mis-declaration of value. In such a case, imposition of penalty is a standalone procedure which need not be set aside.

Madras HC referred to and analyzed Section 111(m) of the Customs Act, 1962 that provides for confiscation of imported goods having improper valuation and Section 112 that deals with penalty for improper importation of goods.

The Court upheld the observation of the CESTAT that the duty liability was conceded at the stage of investigation, which means the allegation of mis-declaration of value stood conceded. If that be so, Section 111(m), gets attracted for confiscation of the goods and consequently Section 112 gets attracted for penalty on importer.

Also, the Court took note of the finding of the Commissioner of Customs, Airport, the investigating authority in this case, that the assessee had admitted availment of benefit under Notification No. 314/85-Customs by way of mis-declaration.

Based on the facts and the provisions of the Customs Act, the Madras HC upheld the penalty order passed by the CESTAT, Madras.

Premier Instruments & Controls Ltd. v. CESTAT, Chennai and Anr. [2018-VIL-113-MAD-CU]

Foreign Trade Policy (FTP)

High Court, Delhi

Notification intending to limit the benefit of incentives must specify the same expressly

Foreign Trade Policy 2009-2014; in favor of assessee

Directorate General of Foreign Trade (DGFT) had issued a Notification No. 43(RE-2013)/2009-2014 dated 25 September 2013 whereby additions were made to paragraph 3.14.5(c) of Chapter 3 to the Foreign Trade Policy (FTP) 2009-2014. First clause by way of addition, was limiting the benefit of Incremental Export Incentivization Scheme (Scheme) for the year 2013-14 to the extent of INR10 million. Second clause inserted vide the said notification provided that the claims in excess of this value will be subjected to greater scrutiny by regional authority.

As a result of the amendment, the claim filed by the assessee for the value exceeding INR10 million before the appropriate authority was rejected on the ground that the claim exceeded the limit prescribed.

Case Laws

Indirect taxCustoms

24 Tax Digest

The issue involved is whether clause: (i) Incorporated in paragraph specified above poses an upper limit of benefit under the Scheme for the year 2013-14 or in view of clause, (ii), Interpretation of the said paragraph claims in excess of this value would be subjected to greater scrutiny by the regional authority.

According to assessee, the language used in second clause overrides the first clause. Plain reading of the first clause seems to indicate the limit of INR10 million to claim benefit under the scheme, however, language of the second clause clearly indicates that there is no upper limit on such claim. The only differentiating factor is the increase in intensity of scrutiny when the amount of benefit under the Scheme exceeds the prescribed limit of INR10 million.

The Delhi HC observed that the provision introduced by the aforesaid notification is similar to the one introduced in Public Notice No. 28/2009-2014(RE-2013) dated 25 September 2013. The Court further observed that the two newly inserted clauses have to be read harmoniously. Clauses (i) and (ii) were not introduced as clauses, but introduced as a part of sub-paragraph (c) to paragraph 3.14.5. It was further observed that clause (i) did not put or prescribe an upper limit and to interpret it differently would make clause (ii) otiose and redundant.

Additionally, the Court referred similar controversy that arose before the Bombay HC where similar clauses were introduced in Paragraph 3.14.4 of the FTP vide Notification No. 44(RE-2013)/2009-2014 dated 25 September 2013.

The Court relied on the ruling of the Bombay HC in the case of J.S.W. Steel Ltd. and Another v. Union of India and Others (2016) 334 ELT 222 (Bom). In the ruling, the Bombay HC observed that apart from adopting a plain meaning approach to the interpretation of the 2013 notification, adopting a purposive approach to its interpretation and construction is necessary.

The Court also relied on the similar view taken by the Calcutta HC in W.P. No. 1355/2015 filed in the case of LGW Industries Ltd. v. Union of India and Others decided on 28 January 2016.

Based on the drafting of the notification and the rulings, the Delhi HC decided the writ in favor of assessee.

Welldone Exim Pvt. Ltd. v. Directorate General of Foreign Trade and Anr. [TS-138-HC-2018(DEL)-FTP]

Central excise

Tribunal, Chennai

Denial of exemption on account of erroneous interpretation of Notification is unsustainable

Central Excise Act, 1944; in favor of assessee

The assessee is manufacturer of poly vinyl chloride (PVC) pipes, fittings and PVC resins and is registered with the Central Excise Department. During the period of July 2008 to October 2008, the assesse cleared PVC pipes for use in drinking water supply project without payment of duty in terms of Notification no. 6/2006 CE dated 1 March 2006.

The SCN was issued proposing to deny the benefit of Notification alleging that the supplies made to the contractor were not eligible for exemption. Further, the certificate issued by the relevant authority does not clearly indicate whether the pipes are used to draw water from the source to storage reservoir or as a part of integral water supply project. Aggrieved by an order, the assessee filed an appeal before the CESTAT.

The assessee submitted that Revenue has not considered the documents submitted by them during the adjudication proceedings. The benefit of Notification was denied by the Revenue stating that there was a delay in filing the required certificate with the District Magistrate. However, Revenue had accepted the certificate condoning the delay in producing the certificate.

The assessee contended that it is clearly stated in the said certificate that the pipes are intended to be used for pumping of water from the Bhimar river/source to treatment plant and then to storage reservoirs. It is not necessary to establish the diameter of the pipes used by the assessee and the assessee has complied with Sl. No. 2 of Sl. No. 7 of the Notification. The benefit was denied by wrongly interpreting the application of Notification and also without considering the certificates produced by the appellant.

25 Tax Digest

Revenue contended that assesses are not eligible for exemption vide the said Notification. Assessee had not produced sufficient evidence to establish the condition in Sl. No. 7(3) wherein only the pipes of outer diameter exceeding 20cms, when used as integral part of water supply project are exempted.

CESTAT referred the relevant Notification and the certificate submitted by the assesee, from which it was clear that the pipes were used for carrying water from the source to treatment plant and to the reservoirs in various villages. Assessee had established that the pipes were used as integral part of water project and also for drawing water from the original source to the reservoirs.

Further, CESTAT found that the assessee has fulfilled the condition in the Notification and is eligible for the benefit of exemption from payment of duty. Therefore, the demand cannot sustain and requires to be set aside. In this regard, impugned order is set aside and appeals are allowed.

Chemplast Sanmar Ltd .v. CCE, LTU, Chennai [2018-VIL-350-CESTAT-CHE-CE]

Tribunal, Mumbai

Rule 8 of Central Excise Valuation Rules will not be applicable where the transaction value for goods cleared for home consumption is available

Central Excise Act, 1944 and Central Excise Valuation Rules, 2000; in favor of assessee

The assessee is engaged in the manufacture of intermediate product in bulk for repacking to their toll packers. Assessee adopted comparable sale price of the goods sold to other customers on principal to principal basis for arriving at the value of goods cleared to their own unit for repacking.

Revenue contended that since the goods are not cleared for sale from the factory, the valuation should be done under Rule 8 of the Central Excise Valuation Rules, 2000 (Excise Valuation Rules) according to which the value should be 115% of the cost of the final product. Revenue observed short payment of duty on comparison between value of 115% cost of final product and the value adopted

by the assessee and passed an order confirming the short payment of duty. Being aggrieved, the assessee preferred an appeal before the Tribunal.

Revenue submitted that the clearance which does not involve the sale, the only provision for valuation is under Rule 8. Therefore, no other provisions or no other value can be adopted for the removal of goods which does not involve sale. Further, it contended that there is no exception provided in the law in such nature of transaction, therefore the provision of Rule 8 is mandatory and the valuation should be done according to the said rule.

The assessee submitted that when the clearance of the excisable goods is made for sale as well as for job-work as in the present case for repacking, the sale price of the identical goods, if available, shall prevail over the valuation, which is to be arrived at under Rule 8. It referred various judicial precedents in support of its submission.

Commissioner v. Steel complex Ltd. [2015-VIL-180-SC-CE]

Ispat Industries Ltd. v. CCE, Raigad [2007-VIL-07-CESTAT-MUM-CE-LB]

Steel authority of India v. CCE, Raipur [2016 (335) ELT 91]

After considering the submissions made by both the parties to the dispute, the Tribunal concluded that the assessee has cleared the same goods partly to various customers on sale basis and partly on their own unit for repacking. In case of an independent sale of the goods, the duty is to be paid on transaction value. As per Section 4(1)(a) of Central Excise Act, 1944, (CEA) the duty is chargeable on the transaction value. However, as per Section 4(ii)(b) and rules made thereunder, if the price is not ascertainable under Section 4(1)(a) then the value should be arrived at on the basis of Excise Valuation Rules.

Since part of the said goods were sold independently to unrelated buyer, the transaction value of the said goods is available. Therefore, the said transaction value will prevail over the value in terms of Rule 8 of Central Excise Valuation Rules, 2000.

The said issue was considered by larger bench in case of Ispat Industries Ltd. (supra) wherein larger Bench observed that Rule 4 of Excise Valuation Rules in any case will be preferred over provisions of Rule 8, not only for the reason

26 Tax Digest

that they occurred first in sequential of Valuation Rules but also for the reason that in a case where both rules are applicable, application of Rule 4 will lead to determination of value, which will be more consistent and in accordance with parent statutory provisions of Section 4 of Central Excise Act, 1944.

In the light of the above, the Tribunal held that the valuation adopted by the assessee, i.e., the transaction value of the same goods sold to independent buyer, is a correct value. Hence, the valuation under Rule 8 of Excise Valuation Rules is not applicable in the facts of the present case. Accordingly, the impugned order is upheld and Revenues appeal is dismissed.

Commissioner of Central Excise, Kolhapur .v. Gharda Chemicals Ltd. [2018-VIL-352-CESTAT-Mum-CE]

CENVAT credit

Tribunal, Mumbai

Availment of CENVAT credit on inputs directly supplied at the site of manufacture cannot be denied

CENVAT Credit Rules, 2004, in favor of assessee

The issue involved in the present case is whether the assessee is entitled to the CENVAT credit on the inputs supplied directly at the site of manufacture of excisable goods.

Revenue contended that as per the CENVAT Credit Rules, 2004 (CCR), the CENVAT credit can be allowed only if the input is received in the factory of the manufacturer. Since the input was sent directly to the site, the credit cannot be allowed due to violation of the CCR.

The assessee submitted that the input on which credit was taken was supplied to the site where the goods have been used in the manufacturing output goods and the excise duty was paid thereon. Further, the value of the inputs so supplied has been directly included in the total value of the goods manufactured at site, therefore there is no reason to deny CENVAT credit.

After considering the submissions made by both the sides, the Tribunal found that the goods were undisputedly

manufactured at site by using input received directly at site, on which assessee has discharged the excise duty. In these factual positions, the compliance of the CCR has been scrupulously made. The contention of the Revenue that the input should come to the factory is baseless for the reason that there is no purpose in bringing the input in the factory as the final product is manufactured at site and thus there was no valid reason to route the inputs through the factory.

Therefore, the Tribunal did not see any reason to deny the CENVAT credit and Revenues appeal was dismissed.

Commissioner of Central Excise, Mumbai II v. V. K. Engineering Pvt. Ltd. [2018-VIL-359-CESTAT-MUM-CE]

Tribunal, Mumbai

Reversal of CENVAT credit unwarranted on removal of inputs on payment of excise duty even though the activity amounts to trading

CENVAT Credit Rules, 2004, in favor of assessee

The asseesee is engaged in the manufacture of bodies for motor vehicles and motor vehicle parts. It has availed CENVAT credit on input such as steel sheets and other inputs as well as on the input services. In some of the cases, the assessee has sold inputs, i.e., steel sheets on payment of excise duty (duty) to their vendor on sale basis. The vendor availed the credit of the duty so paid by the assessee and after manufacturing of the component by using the inputs so procured, the same is returned to the assessee on payment of duty on sale basis. The assessee in turn availed the credit of the said manufactured component and thereafter used in the manufacture of their sub-assembly. The sub-assembly is cleared on payment of duty.

As per Revenue, the