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FOREWORD As a part of our regular quarterly update exercise, we are pleased to present the direct and indirect tax updates covering the material changes that took st th place during the period from the 1 of April to 30 of June, 2019. We have also covered the judicial precedents covering some of the important decisions rendered by the Indian judiciary during this period. As the cover story, we have identied that the decision to ratify the Multilateral Instrument (“MLI”) by the Indian Government is a very important initiative by it and puts Indian taxation system comparable with the global taxation regime. We have tried to discuss in greater detail about the various issues considered by the MLI and when would they become effective. This has the potential to transform the global taxation regime as individual aspects of individual treaties may no longer be the basis on which international taxation issues shall be discussed. This would also bring in some sort of global coherence regarding a number of complex issues. In addition to the above cover story, we have also dealt with other important developments and judicial precedents in the eld of taxation. We hope you nd the newsletter informative and insightful. Please do send us your comments and feedback at . [email protected] Regards, Cyril Shroff Managing Partner Cyril Amarchand Mangaldas Email: [email protected] TAX SCOUT A quarterly update on recent developments in Taxation Law APRIL 2019 – JUNE 2019 © 2019 Cyril Amarchand Mangaldas 01

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Page 1: Tax Scout April – June 2019 copy2

FOREWORDAs a part of our regular quarterly update exercise, we are pleased to present the direct and indirect tax updates covering the material changes that took

st th place during the period from the 1 of April to 30 of June, 2019. We have also covered the judicial precedents covering some of the important decisions rendered by the Indian judiciary during this period.

As the cover story, we have identied that the decision to ratify the Multilateral Instrument (“MLI”) by the Indian Government is a very important initiative by it and puts Indian taxation system comparable with the global taxation regime. We have tried to discuss in greater detail about the various issues considered by the MLI and when would they become effective. This has the potential to transform the global taxation regime as individual aspects of individual treaties may no longer be the basis on which international taxation issues shall be discussed. This would also bring in

some sort of global coherence regarding a number of complex issues.

In addition to the above cover story, we have also dealt with other important developments and judicial precedents in the eld of taxation.

We hope you nd the newsletter informative and insightful. Please do send us your comments and feedback at [email protected]

Regards,

Cyril Shroff

Managing Partner

Cyril Amarchand Mangaldas

Email: [email protected]

TAX SCOUTA quarterly update on recent developments in Taxation Law

APRIL 2019 – JUNE 2019

© 2019 Cyril Amarchand Mangaldas01

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INDEX

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COVER STORY

• Welcome to the world of MLI: How will it impact India’s tax treaties ..............................................................................04

CASE LAW UPDATES- DIRECT TAX

Case Law Updates - International tax

• Kolkata ITAT holds income from testing services rendered outside India as FTS under the India-Finland DTAA .........15

• No withholding tax on payments made for services relating to GDR issue ....................................................................18

• Delhi ITAT holds that consideration received for preparation of design and drawings would be considered as business income, and not royalty, when there is a PE in India......................................................................................................20

Case Law Updates - Transactional Advisory

• Receipt of share application money relevant for trigger of Section 56(2)(viib) of the IT Act...........................................23

• Amounts paid towards discharge of mortgage obligation in connection with a property – not cost of acquisition .........25

• Bombay HC had held addition under Section 68 of the IT Act cannot be made merely due to large investments made through an investment vehicle........................................................................................................................................27

• Madras HC dismisses Cognizant's writ over share buy-back characterization ..............................................................30

• Mumbai ITAT holds buy-back of FCCB at discounted price not business income..........................................................33

Case Law Updates - Miscellaneous

• Bangalore ITAT treats customer relationship rights as goodwill eligible for depreciation ...............................................36

• Mumbai ITAT Deletes Notional Rental Addition on Unsold Inventory held as Stock-in-Trade........................................38

• SC vacates stay granted by Delhi HC on notication enabling retrospective exercise of powers under Black Money Act .............................................................................................................................................................40

CASE LAW UPDATES- INDIRECT TAX

AAR Rulings

• ITC can be claimed when consideration is paid through book adjustment.....................................................................43

Case Law Updates – Other judicial pronouncements

• Sale of goods by a Duty Free Shop not exigible to GST................................................................................................46

• Writ is maintainable for pre-arrest bail in case of offences under GST legislations........................................................48

• Transfer of land development rights not a taxable service .............................................................................................50

• ITC available on construction of immovable properties for letting out ............................................................................52

• Transitional credit permissible where no refund was claimed under erstwhile law ........................................................54

• Not mandatory to set up permanent bench of tribunal at place where permanent seat of HC is situated......................56

• DGAP is legally bound to investigate a proteering case once referred or noticed........................................................58

Regulatory Direct Tax Updates

• India-Marshall Islands Tax Information Exchange Agreement Notied ..........................................................................62

Regulatory Indirect Tax Updates

• Applicability of GST on additional/penal interest ............................................................................................................64

• Treatment of post-sales discounts under GST ...............................................................................................................64

• Clarication regarding place of supply in respect of services provided by ports ............................................................64

• Refund of taxes to the retail outlets established in departure area of an international airport beyond immigration counters making tax free supply to an outgoing international tourist..............................................................................64

• Regulations notied for electronic integration declaration (“EID”) in relation to export of goods....................................65

• DGFT amended the import policy for electronics and IT Goods ....................................................................................65

• Increase in the validity period of export authorization ....................................................................................................65

• Mechanism to verify IGST payments for goods exported out of India............................................................................65

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COVER STORY

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WELCOME TO THE WORLD OF MLI: HOW WILL IT IMPACT INDIA’S TAX TREATIES

1. Background

The Organisation for Economic Cooperation and Development (“OECD”) had undertaken a landmark Base Erosion and Prot Shifting (“BEPS”) project from the year 2009, at the behes t o f G -20 coun t r i es , i nvo l v i ng collaboration of more than 100 countries, in order to address the international tax avoidance techniques adopted by multinational companies (“MNCs”) to minimise their global tax liabilities. Such tax avoidance techniques generally refer to the strategies of MNCs that exploit gaps and mismatches in tax rules to articially shift prots to low or no-tax locations and reduce tax base for other high tax countries.

The intention was to revise the international tax framework in order to align it with the globally agreed position of taxing prots where the economic activities are carried out and value is created.

Carrying out such large scale changes on a treaty-by-treaty basis would have been time consuming and bilateral negotiations may have led to inconsistencies across treaties due to the inter-relations of the jurisdictions. Thus, BEPS Action Plan 15 was developed which contains the Multilateral Instrument (“MLI”) as an innovative mechanism that would allow a more coordinated approach with immediate effect, while retaining the exibility required to implement these changes in a broadly consensual framework to tackle base erosion.

On June 7, 2017, 68 developed and developing countr ies, including India, s igned the “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Prot Shifting” in Paris, popularly referred to as MLI, to modify a large number of bilateral tax treaties entered into by over 68 countries. The signing of MLI represents the dawn of a new era with respect to the taxation of cross-border businesses. Technically, an MLI offers concrete solutions for governments to close loopholes in international tax treaties by transposing results from the BEPS project into

bilateral tax treaties worldwide.

While the MLI attempts to retain exibility by providing the countries a template of limited choices to choose from, it also mandates compliance with certain ‘minimum standards’. These minimum standards are aimed to counter treaty abuse and to improve dispute resolution mechanisms while providing exibility to accommodate specic tax treaty policies.

At the time of signature, India submitted a list of 93 tax treaties entered into by India with other jurisdictions that India would like to designate as Covered Tax Agreements (“CTA”) i.e. tax treaties to be amended through the MLI. Along with CTA list, India also submitted a provisional list of reservations and notications i.e. its MLI position with respect to various provisions of MLI.

Recently, on June 12, 2019, India announced her ratication of the MLI. The impact of the MLI on India’s CTAs shall be signicant and requires careful consideration for existing and proposed transactions and structures. As a next step, India also deposited its ratied MLI with the OECD with its nal positions on June 25, 2019.

India has notied 93 CTAs and as per the status updated by OECD till June 28, 2019, 29 countries (including India, Australia, Finland, France, Israel, Japan, Netherlands, New Zealand, Russia, Singapore, UAE, UK, etc.) have completed their ratication, out of which India has CTA with 22 countries.

2. Timelines for MLI

(i) Entry into force

For each country signing the MLI, the MLI shall come into force on the rst day of the month following the expiry of three months from the date of deposit of instrument of ratication with OECD.

Thus, as India submitted its instrument of ratication with the OECD on June 25, 2019, the MLI for the 22 countries with India will enter into force from October 01, 2019. For the remaining countries, the MLI will enter into force from the expiry of 3 calendar months from the end of the month in which these remaining countries submit their ratication of MLI.

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For each CTA, it also needs to be analyzed whether the other jurisdiction has also ratied the MLI and from what date, in order to ascertain the time from when the provisions become effective for the tax treaty.

(ii) Entry into effect

The timelines for the MLI to come into effect with respect to a CTA differs based on the type of taxation to which the modications apply.

• In case of withholding tax at source on amounts paid to non-residents such as royalties, fee for technical services, interest, capital gains, etc. – MLI will enter into effect where the event giving rise to such withholding taxes occurs on or after the rst day of the next calendar year that begins on the latter of the dates on which the MLI comes into force for each treaty partner.

For example, in case of India and Singapore, if the MLI enters into force for India on June 2019 and for Singapore on September 2018, the CTA date is June 2019 and the MLI will come into effect for all withholding taxes under the India-Singapore tax treaty which relate to an event occurring on or after January 2020.

For the purpose of its own application of MLI to withholding taxes, India has chosen to replace “taxable period” for “calendar year”. Accordingly, in the above example, MLI will cover a withholding tax payable in India if the event giving rise to such tax takes place on or after April 1, 2020, while it will cover a withholding tax payable in Singapore if such event takes place on or after January 1, 2020.

• For all other taxes – MLI will come into effect for taxable period beginning on or after an expiry of 6 calendar months from the CTA date.

Hence, in the above example, for taxes such as tax on bus iness p ro ts attributable to a PE, the MLI shall apply to such taxes levied in India from FY 2020-21, whereas it will apply for the purpose of such taxes levied in Singapore on or after January 1, 2020.

Thus, the provisions of MLI will also impact India’s tax treaties with countries who have listed India as a CTA and have already deposited the instrument of ra t i ca t ion w i th OECD, fo r bo th withholding taxes and other taxes with effect from FY 2020-21 and onwards.

Two countries can opt for different years – taxable year or calendar year. For both, the MLI will apply asymmetrically.

For the remaining CTAs, MLI will be effective after such countries ratify MLI. Thus, as the tax treaties will be impacted at an overall basis and the impact of such an amendment could be signicant, it would be relevant to analyse its impact on each of the articles.

3. Key provisions and their impact on India's bilateral tax treaties

Part I – Scope and interpretation of the terms

(i) Article 1 – Scope of the convention

Article 1 gives the scope of MLI and claries that it will modify all CTAs.

(ii) Article 2 – Interpretation of terms

Article 2 provides the denitions of various terms used in the MLI. The signicant extracts of the denition are as below:

• The term CTA means an agreement for the avoidance of double taxation with respect to taxes on income (whether or not other taxes are also covered) that is in force between two or more parties and/or jurisdictions and with respect to which each such party has made a notication to the Depository of the OECD listing the agreements which are intended to be covered through this MLI;

• A party means a jurisdiction which has signed the MLI and for which the MLI is in force; and

• The term contracting jurisdiction means a party to a CTA.

Part II – Hybrid mismatches

Part II of the MLI covers Article 3 to 5 containing provisions for prevention of double non-taxation by hybrid mismatch arrangements, an arrangement

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intended to secure a tax advantage within a multinational group resulting from a difference in tax treatment of the same nancial instrument or entity in different jurisdictions. These articles give the best practices (not minimum standards) to ensure that the benets are only granted to hybrid entities in appropriate cases.

(iii) Article 3 – Transparent Entities

MLI provides that income derived by or through a transparent entity shall only be considered income of a resident to the extent that income of such entity is treated for the purposes of taxation, as income of a resident of that contracting state. This provision is not a minimum standard and hence, it is optional for the countries whether to adopt the same or not.

India has reserved her right for non-applicability of the Article 3 in entirety.

Generally, India’s tax treaties do not contain a provision for scally transparent entities. Accordingly, an entity which is not “liable to tax” in the country where it has been formed may not qualify to be a resident to avail treaty benets.

Consequently, the eligibility of such entities to claim benet under India's tax treaties would continue to be as per the provisions of the particular tax treaty in this regard. Accordingly, the challenges faced by such entities like inability to claim credit of foreign taxes will remain.

(iv) Article 4 – Dual Resident Entities

MLI provides that residency of a person (other than an individual) who is resident in more than one contracting state (i.e. a dual resident entity), shall be determined by a Mutual Agreement Procedure (“MAP”) between the competent authorities of the contracting states having regard to its place of effective management (“POEM”), place of incorporation or constitution and any other relevant factors. It also provides that in absence of any agreement between the jurisdictions, such dual-resident entity will either not be entitled to any relief or tax exemption under the tax treaties except as agreed upon between the competent authorities of the contracting jurisdictions or will not be entitled to any relief or tax exemption at all.

At present, the OECD Model Convention provides that a dual resident entity shall be deemed to be a resident of the state in which its POEM is situated. Most of the tax treaties signed by India also contain the POEM clause as a tie-breaker rule to determine the tax residence of an entity.

India has not provided any reservation on applicability of this Article. Further, India has

1also chosen to apply this provision for 91 CTAs wherein residence of a dual resident entity will be determined based on MAP. Please note that this provision would apply only if the other treaty partner also agrees to apply Article 4 of the MLI.

(v) Article 5 – Methods for elimination of double taxation

Article 5 of the MLI refers to three options for preventing double non-taxation situations arising due to the residence state providing relief under the exemption method for income not taxed in the source state. As this is not a minimum standard, the fourth option available is to not adopt any of the options given above. Further, in case each contracting jurisdiction chooses a different option, the option chosen by a contracting jurisdiction shall apply with respect to its own residents.

India has expressed its reservation for Article 5 not to apply to any of its tax treaties in entirety. The possible reason for the same may be that India's tax treaties apply the credit method for providing relief from double taxation, the situation of double non-taxation (i.e. in both the source country and resident country) contemplated under Article 5 may not be relevant in the Indian context.

Part III – Treaty abuse

Part III of the MLI covers Article 6 to 13 containing provisions for prevention of treaty abuse. These are minimum standards in order to ensure a minimum level of protection against any treaty shopping being contemplated by certain MNCs.

(vi) Article 6 – Purpose of a CTA

Article 6 of the MLI provides a mandatory requirement to modify the text of the preamble of the CTA, by including the prescribed language to express the common intention of the

1 Except for Greece and Libya

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contracting states to eliminate double taxation. The language also includes the intent not to create opportunities for non-taxation or reduced taxation. Further, the language refers to a desire to develop an economic relationship or to enhance co-operation in tax matters, could also be added to the preamble if it is not already present.

Adoption of the above language is a mandatory requirement and accordingly, India’s tax treaties are likely to be modied to include the prescribed text. However, as there are no detailed discussions / guidelines available regarding this Article, it is not clear whether India has adopted the additional language regarding economic relationship and co-operation or not.

(vii) Article 7 – Prevention of Treaty Abuse

Article 7 of the MLI contains the provisions in relation to prevention of treaty abuse – which is a minimum standard. Under this Article, a benet under a CTA shall not be granted if it is concluded that obtaining the requisite benet was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benet, unless it is established that granting the benet would be in accordance with the object and purpose of the relevant provision of the CTA.

Certain jurisdictions may also choose to apply the provisions related to simplied limitation on benets (“LOBs”) provisions to their CTAs. Simplied LOB provisions require an entity to be able to claim relief in respect of an income, only if it is a 'qualied person' or if it is engaged in 'active business' and the income derived by such entity from India would need to be incidental to or emanate from its business. Also, (i) operating as a holding company; (ii) providing overall supervision or administration of group companies; (iii) providing group nancing; or (iv) making or managing investments (unless it is a bank or insurance company or registered securities dealer in the ordinary course of its business), do not qualify as 'active business' for the purposes of the MLI.

With regard to dealing with prevention of treaty abuse by applying the principal purpose test, India has not provided any reservation. As it is a minimum standard, it will apply to all CTAs.

Further, India has notied the list of 36 tax treaties which already contain the provision limiting the benet of the tax treaty if it is established that obtaining tax benet was one of the main purposes of the transaction. The provision of Article 7 shall be replaced by the language contained in the MLI where the other contracting state also noties with respect to this provision. Where the other contracting state does not notify this provision, the provision of MLI shall be superseded if the language of original provision is incompatible with this provision.

India has also chosen to apply the simplied LOB provision. If the other contracting state does the same, India’s CTAs may accordingly get amended to include the simplied LOB rule. At present, only 9 tax treaties signed by India have an LOB clause which shall be replaced by simplied LOB. MLI may supersede the language contained in the original provision if it is found to be incompatible with the MLI. Once adopted, a taxpayer will have to satisfy the simplied LOB rule in addition to the principal purpose test (“PPT”) to obtain the treaty benets.

(viii) Article 8 – Dividend Transfer Transactions

Article 8 of the MLI stipulates the conditions under which a person of one contracting state (holding shares benecially) can avail an exemption or limited rate of tax on dividends paid by another non-resident company. Article 8 requires the shares to be held by the benecial owner throughout a minimum holding period of 365 days in order to claim an exemption or lower withholding tax rate on dividend income. Contracting states can reserve the application of this Article in its entirety or reserve the holding period contained in any CTA, which is more or less than a period of 365 days.

India has notied 21 of its CTAs where a holding period of 365 days is proposed to be applicable in order to grant the benet of a concessional tax rate of dividend. If the other contracting states also notify these provisions, the provisions of the CTA would be replaced by Article 8 of the MLI. Further, India has reserved its right for the non-applicability of Article 8 on the India Portugal tax treaty where it already has a 24 month holding period condition.

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Please note that Article 8 may not signicantly impact India under Indian domestic tax regulations, DDT is payable by the company distributing dividends and such dividend is exempt in the hands of shareholder.

(ix) Article 9 – Capital gains from transfer of share deriving value from immovable property

Article 9 of the MLI provides for indirect transfer taxation to levy the capital gains tax arising from alienation of shares or comparable interest of companies or other entities such as partnership or trust; that derive more than a certain percent of their value (“Value Threshold”) from immovable property, in the state where the immovable property is situated.

Article 9 provides for 2 (two) alternatives: (a) Option 1, which provides that where Value Threshold is met at any time during the 365 days preceding the transfer, capital gains from the sale of shares or comparable interests shall be taxable in the country where immovable property owned by the entity is situated. Contracting states can bilaterally negotiate the Value Threshold in their tax treaties; and (b) Option 2, which is similar to Option 1 but xes a Value Threshold of more than 50% for the trigger of source taxation in Article 9.

India has chosen to apply Option 2, and the look back period of 365 days triggers the source taxation of the transfer of shares or comparable interest where such shares or comparable interest derive more than 50% of their value form immovable property situated in India. While India has notied 71 of its CTAs which contain provisions dealing with source taxation of transfer of shares which derive their value from immovable property as mentioned in Option 1. In the event that the other contracting states also choose Option 2, the provisions of CTAs would be replaced by this provision given in MLI.

If the other contracting state does not notify the provisions of the respective CTAs, the provisions of MLI shall be superseded to the extent the provisions of CTAs are incompatible with the MLI.

(x) Article 10 – Anti-abuse rule for permanent establishment situated in a third jurisdiction

Article 10 of the MLI provides that where:

i. an enterprise of a contracting state to a CTA derives income from another contracting state and the former state treats such income as attributable to a PE of the enterprise situated in the latter state;

ii. the prots attributable to that PE are exempt from tax in the former state, then the benets of the CTA shall not apply to any item of income on which tax in the latter state is less than 60% of the tax that would be imposed if that PE was situated in the former state. In such a case, the MLI provides that such income shall remain taxable as per the domestic law of the latter state. The MLI also provides that any income derived from the former state in connection with / or incidental to active conduct of a business carried out through the PE (other than business of making, managing or simply holding investments for enterprise’s own account, unless these activities are banking, insurance, or securities activities carried on by a bank, insurance enterprise or registered securities dealer, respectively) shall not be subject to tax in the latter state.

iii. If benets are denied as mentioned above with respect to item of income derived by a resident of a contracting state, the resident may request the competent authority and then, the competent authority may still grant the benets if it is determined that granting the benet is justied.

India has neither expressed any reservation nor has it notied any provisions of its CTA. Consequently, the MLI provisions in this respect would supersede the CTA and would apply to the extent that the provisions of the latter are incompatible with Article 10 of the MLI.

(xi) Article 11 – Application of Tax Agreements to restrict a Party's right to tax its own residents

Article 11 provides a saving clause to clarify that CTA shall not affect the right of taxation of a contracting state to tax its own residents, save for certain benets granted, under the provisions of the CTA.

India has neither expressed any reservation nor has it notied any of its CTA, which contain such a provision. Consequently, the MLI provisions in

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this respect would supersede the CTA and would apply to the extent that the provisions of the CTA are incompatible with Article 11 of the MLI.

Part IV – Avoidance of Permanent Establishment Status

Part IV of the MLI covers Articles 12 to 15 containing mechanism for amendment of denition of PE in the existing tax treaties. However, the rules of attribution of prots to a PE have not been changed.

(xii) Article 12 – Articial Avoidance of PE through commissionaire arrangement and similar strategies

The MLI provides for a broader dependent agency PE rule. In addition to its applicability to persons having the authority to conclude contracts, the agency PE rule now extends to persons who habitually play the principal role in the conclusion of contracts that are routinely concluded, without material modications by the enterprise and these contracts are in the name of enterprise, or for transfer of ownership or granting right to use a property, or for provision of services. The activities described would however not create a PE, if carried on by certain independent agents in ordinary course of business.

Under the MLI provisions, a person cannot be considered an independent agent if he acts exclusively or almost exclusively on behalf of a person closely related to such enterprise. Article 12 gives an option to countries to opt out of this Article in its entirety.

While this is not a minimum standard and the MLI gives a right to countries not to adopt this article in entirety, India has not expressed any reservation and has notied all of its CTA, which contain provision(s) dealing with agency PE. If the other contracting states also notify the CTA, the provisions of the CTA would be replaced by Article 12 of the MLI.

However, if the other contracting state does not notify the provisions of the respective CTA, the MLI provisions contained in Article 12 would not apply to the CTA.

(xiii) Article 13 – Articial Avoidance of PE through specic activity exemption

Article 13 deals with specic activity exemptions to PE and provides two options to achieve this.

Option 1 provides that listed activities would qualify for specic activity exemption only if such activity qualies as preparatory or auxiliary in character. On the other hand, Option 2 allows contracting states to retain the automatic exemption to listed activities, irrespective of the same being preparatory or auxiliary based on the premise that these specically listed activities are intrinsically preparatory or auxiliary.

Additionally, Article 13 also provides for adopting an anti-fragmentation rule which denies specic activity exemption where the activities carried out by the foreign enterprise along with its related parties, at the same or another place, exceed the preparatory or auxiliary character.

India has chosen Option 1 and has accordingly notied all of its CTA which contain provisions dealing with preparatory and auxiliary activity exemption. When the other contracting state chooses Option 1 and also noties the CTA, the relevant provisions of the CTA would be replaced by Option 1 of Article 13 of the MLI. However, in case the other contracting state chooses Option 2, then due to incompatibility, the MLI provisions in Article 13 would not apply.

Where the other contracting state does not notify the provisions of the respective CTA, the MLI provisions contained in Article 13 would not apply to the CTA. It may be pertinent to note that India has not notied any provisions in respect of the anti-fragmentation rule and hence, it would not be relevant for India's CTAs.

(xiv) Article 14 – Splitting of contract

Article 14 of the MLI provides for determining time thresholds in a tax treaty for construction / installation / supervisory or any PE provision have been exceeded under a CTA. The Article provides for an aggregation of time spent on connected activities by related parties in the same project to determine the threshold. This provision is optional and does not apply where either of the contracting states have made a reservation on the application of this Article.

India has neither expressed any reservation nor has it notied any of its CTAs. In the event that the other contracting state noties or does not notify the CTA, the provisions of Article 14 of the MLI would apply to the extent the provisions of the CTAs are incompatible with Article 14. This is

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applicable unless the other contracting state expresses its reservation on the applicability of Article 14, in which case those CTAs would not be impacted by this article.

(xv) Article 15 – Denition of closely related to entity (“CRE”)

Article 15 of the MLI provides the denition of CRE for the purposes of Article 12-14 of the MLI. For this purpose, a related party in relation to an enterprise covers a person who has control over the other enterprise or both are under control of same persons or enterprise. This provision also deems a person as a related party if such person possesses directly or indirectly more than 50% of the: (i) benecial interest; or (ii) aggregate vote and value of shares of an enterprise.

India has not expressed any reservation; the denition would apply to the CTA unless the other contracting partner to the CTA expresses a reservation on applicability of Article 12 - Article 14 of the MLI.

Part V – Multi Agreement Procedure (“MAP”)

Part V of the MLI provides the minimum standards for improving dispute resolution and the best practices associated with it.

(xvi) Article 16 – MAP

Article 16 requires contracting states to allow taxpayers to present a MAP case to the competent authorities (“CA”) of either of the contracting states unlike the earlier procedure of being able to present the case only to the CA of the state of residence. Furthermore, Article 16 requires that MAP access should be allowed in a case where the MAP application is presented within three years of the rst notication of the action resulting in taxation not in accordance with a CTA.

Under the MLI, CAs of both the states need to endeavour to resolve a case under MAP if they are not able to arrive at a satisfactory solution unilaterally. Also, the MAP agreements are to be implemented notwithstanding any time limits under domestic laws. The CA may also consult together for the elimination of double taxation in cases not provided for in the CTA.

i. Bilateral recourse to MAP

India has reserved its right for not adoptingthe modied provisions on the basis that itwould meet the minimum standard by allowing MAP access in the resident state and by implementing a bilateral notication process. Thus, each of the CTA would have a bilateral notication process to allow MAP recourse not only to Indian residents but also residents of other contracting states of CTA.

ii. Time period of three years to invoke MAP

India has notied tax treaties which provide a lower limitation period of (a) 2 (two) years and; (b) those that have minimum period of 3 (three) years for presenting a MAP case. Thus, the notied tax treaties with Belgium, Canada, Italy and UAE would now provide a minimum time limit of three years for MAP access.

India has also noties a list of 7 tax treaties where such a provision for time limit doesnot exist. Post the MLI, such tax treaties would also have this minimum standard provided the other contracting jurisdiction also makes a comparable notication.

iii. Bilateral MAP when unilateral MAP fails

India has notied its tax treaties which require a provision enabling bilateral MAP with the CAs of both the contracting states when unilateral MAP does not resolve the dispute.

(xvii) Article 17 – Secondary Adjustments

As a minimum standard under dispute resolution, the contracting states are to provide MAP access in transfer pricing (“TP”) cases. Also, as a complementing best practice, the MLI suggests that contracting states include a provision to provide that where a TP adjustment is made in one of the contracting states,the other contracting state shall provide corresponding adjustment. The MLI provides that a contracting state may opt out of this provision to the extent the CTA already contain such a provision.

India has reserved its right for the entirety of Article 17 not to apply to CTA and has notied its CTA that already contain the enabling provision

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for secondary adjustment. Accordingly, the provisions of Article 17 will not apply to the treaties with these countries if the other contracting jurisdiction agrees to the same. For CTA that do not contain such a provision, the provisions of Article 17 would apply to the extent the provisions of the CTA are incompatible with the former.

4. Illustrative analysis of Articles of MLI having impact on certain tax treaties of India

Given below is a comparative of impact on India’s tax treaties with certain countries in order to give an indication of how the Articles of existing tax treaties would be impacted due to MLI:

Sl.

No.

MLI provision Impact of MLI on India’s tax treaties

Singapore Netherlands Japan France

1 Article 2 – CTA Both countries have covered each other as CTA 2 Article 4 – Dual

resident entities

Does not

apply

Article 4(3) of existing tax

treaty to be

replaced by

Article 4(1) of

MLI.

Article 4(2) of

existing tax

treaty to be

replaced by

Article 4(1) of

MLI. However,

no discretionary

relief can be

provided by

CA.

Does not apply

3

Article 6 – Purpose

Existing treaty language to co-exist along with additional language

prescribed (minimum standard). 4

Article 7 –

Prevention of

treaty abuse

PPT to apply and supersede the provisions of the tax treaty to the

extent incompatible with MLI. Simplied LOB not adopted by

these jurisdictions.

5

Article 8 –

Dividend

transfer

transaction

Does not apply

6

Article 9 –

Capital gains

from transfer of

share deriving

value from

immovable

property

Does not

apply

Source country

to get taxing

right if value

threshold met

anytime during

365 days

preceding the

date of

transfer.

Threshold for days and percentage

shareholding to be introduced and

shall supersede the provisions of

tax treaty to the extent

incompatible with MLI.

7

Article 10 –

Anti abuse rule

for PE situated

in third

jurisdiction

Does not

apply

MLI provision supersedes the

provisions of tax treaty to the

extent incompatible with MLI.

Does not apply

11

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8 Article 11 –

Application of

Tax Agreements

to restrict a

Party's right to

tax its own

residents

Does not apply

9

Article 12 –

Articial

Avoidance of

PE through

commissionaire

arrangement and

similar

strategies

Does not apply

Extended denition of dependent

agent given in MLI applicable.

Independent agent denition as

per MLI to apply

10

Article 13 –

Articial

Avoidance of

PE through

specic activity

exemption

Does not

apply

Activities carried on individually

or collectively are preparatory or

auxiliary in nature. Also, anti -

fragmentation provision shall

apply.

Anti -

fragmentation

provision shall

apply

11

Article 14 –

Splitting of

contract

Does not

apply

MLI provision

supersedes the

provisions of

tax treaty to

the extent

incompatible

with MLI

Does not apply

12

Article 16 –

MAP

Does not apply

Further, it is relevant to note the following in respect of certain other countries:

(I) US is not a party to the MLI.

(ii) MLI should not apply for China, Germany and Mauritius as these countries have not included India as a CTA.

(iii) Neither India nor Hong Kong have included each other as CTA, so the MLI shall not apply with Hong Kong.

Hence, India’s DTAA with the above jurisdictions shall not be impacted by the MLI.

12

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5. Way forward

The MLI marks a key milestone in the implementation of the BEPS project.

India’s involvement in the rst signing ceremony of MLI indicates India’s commitment and her proactive approach in combating BEPS. The success of the MLI would also depend on the number of countries that will sign it.

Having said the above, the OECD needs to be applauded for coming with a quick alternative as compared to the mammoth task of modication of more than 3,000 tax treaties. It is alsoworth noting that the OECD has done this phenomenal work over the last 4-5 years.

With the PPT being implemented as a minimum standard and strategies for avoidance of PE being tackled by Article 12 to 14 of the MLI, the network of the bilateral tax treaties will undergo a vital change. In the short and medium term, the MLI is likely to increase the complexity of doing business with other jurisdictions before the ambiguities are settled and stability is established. However, in a long run, the MLI will go a long way towards reducing BEPS.

13

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CASE LAW UPDATES

- DIRECT TAX

- INTERNATIONAL TAX

CASE LAW UPDATES

14

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KOLKATA ITAT HOLDS INCOME FROM TESTING

SERVICES RENDERED OUTSIDE INDIA AS FTS UNDER

15

THE INDIA-FINLAND DTAA

2In the case of Outotec (Finland) Oy, the Kolkata

ITAT held that in a sale of designs and drawings to

Indian buyers, income in the hands of the Finnish

seller would not be taxable in India in the absence of a

PE, since it would be characterized as business

income and not royalty or FTS. The ITAT has also held

that income from testing services rendered in Finland

but used by service recipients in India, would be

taxable in India despite the presence of a unique

clause in the India-Finland DTAA, which confers the

right of taxation on the country in which the service

was performed.

FACTS

Outotec (Finland) Oy (“Assessee”), incorporated in

Finland and a resident of Finland, was involved in the

business of providing solutions for customers in the

metal processing industry. During AY 2015-16, the

Assessee had earned over INR 28 Million from Indian

entities from the sale of designs and drawings and INR

33 Million from rendering testing and other services,

which were not offered to tax. The AO sought to tax the

consideration for sale of designs and drawings as

royalty taxable under Section 9 of the

IT Act read with Article 12 of the

India-Finland DTAA and income

from rendering testing services as

royalty and alternatively as fees for

technical services, both under the IT

Act and the India-Finland DTAA. The

Assessee objected to the additions

made, on the basis that the income

from sale of designs and drawings was for the sale of a

copyrighted product and was business income not

taxable in absence of a PE in India, and the income

from rendering of testing services was not taxable

basis Article 12(5) of India-Finland DTAA as the

testing services were rendered outside India.

However, the AO rejected the contentions of the

Assessee and proceeded to bring the income to tax.

The additions made by the AO in the draft assessment

order were conrmed by the DRP. Thus, the additions

were sustained in the nal assessment order.

Aggrieved by the order of the AO, the Assessee went

on to appeal before the ITAT.

ISSUES

• Whether the income from ‘sale’ of designs and

drawings by the Assessee constituted royalty

taxable in India?

• Whether income derived from rendering testing

and other services in Finland for Indian

customers constituted fees for technical

services taxable in India?

ARGUMENTS

In relation to the sale of designs and drawings, the

Assessee argued that the Assessee had standard

technologies available with it, based

on which the designs and drawings

were prepared outside India, and the

sale was effected outside Indian

territory with the consideration

received outside India in foreign

currency, and therefore, the same

would not be taxable in India. Relying

on the ITAT orders in the case of the

Assessee’s group concerns for past AYs, the

Assessee submitted that the income was neither

royalty nor FTS, and that the business income was not

chargeable to tax in the absence of a PE in India. On

the contrary, the IRA drew attention to the ‘sale’

“”

FTS under Article 12(5) of theIndia-Finland DTAA is

taxed where the services are‘used’, immaterial of where

they are ‘performed’.

2 Outotec (Finland) Oy, Kolkata v. DCIT, ITA No. 2601/Kol/2018, decided on May 31, 2019.

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agreements, which seemed to allude that the

Assessee only grants the Indian customers the right to

use the designs and drawings and no title in designs

and drawings was transferred. Further, the IRA

argued that the designs were customized as per the

needs of the Indian customers and then imbedded into

their plants.

Second, with regard to the income from testing

services, the Assessee invoked the uniquely worded

special carve-out provided within Article 12(5) of the

India-Finland DTAA, under which unlike the taxability

in the source country, fees received in respect of

technical services is taxed in the country where the

services are performed. The Assessee claimed that

since all the services were rendered in Finland and no

employees of the Assessee visited India at any point

for this purpose, the same would be taxable only in

Finland and not in India. The IRA on the other hand,

sought to apply the source rule, which is codied in the

rst sentence of Article 12(5) of the India-Finland

DTAA. The source rule directly confers the right of

taxation to the country in which the payer is a resident.

The second sentence appears as a carve-out to the

source rule in the India-Finland DTAA. The IRA

contended that not applying the source rule would

amount to a selective reading of the Article which

would be inconsistent with the scheme of Article 12(5).

As per the provisions of section 9(1)(vii) of the IT Act,

since the services, although rendered in Finland, had

been availed in India for the business in India, the

source country, i.e., India would have the right to tax

the income.

DECISION

On the question of taxability of the sale consideration

for drawings and designs, the ITAT largely deferred to

the observations of the Kolkata ITAT in the case of the 3

Assessee’s sister concern pertaining to an earlier AY.

In that case, the ITAT had, upon studying the context of

the transfer of designs and drawings, had held that the

income from such transfer did not amount to royalty,

on the basis of the fact that transfer was for the use of a

copyrighted product and not the copyright itself.

Further, it had been noted that there were restrictions

on the commercial usage or exploitation of the

drawings, i.e., they were to be used by Indian

customers for internal purposes of setting up their

plant, and not for commercial exploitat ion.

Accordingly, the ITAT had held that any payment for a

product that could not be readily commercially

exploited, would not constitute royalty. The ITAT in the

Assessee’s case concurred fully with the view taken

by the ITAT in the case of the Assessee’s sister

concern. Further, the nding of the DRP regarding

FTS was reversed by the ITAT. Thus, it was held that

the consideration was paid for sale of a product which

was to be embedded in the plant set up by Indian

customers, and was, therefore, not in the nature of

royalty or FTS, but was in the nature of business

income. As the Assessee did not have a PE in India,

the income was held as not taxable in India.

Next, on the issue of income from testing services, the

ITAT engaged in a reading of the second sentence of

Article 12(5) of the India-Finland DTAA and concluded

that the same does not apply to the Assessee’ case,

since the results of the Finnish testing services were

‘used’ in India. Since the payment in question was

made not for the testing process itself, but for the

results of the testing, which were utilized in India by the

Indian customers (i.e. service recipients), the same

would be taxable in India under the provisions of the IT

Act.

SIGNIFICANT TAKEAWAYS

In respect of royalty, the ITAT has meticulously set out

its views on the issue relating to income from sale of

copyrighted material not being royalty / FTS, but

business income which is not taxable in India in the

absence of a PE.

However, with regard to testing services, the ITAT

appears to have combined the provisions in the India-

Finland DTAA pertaining to royalty and FTS. Under

Article 12(5), while the royalty paid for ‘use’ of a right or

property is taxed in that state where the same is used,

FTS is taxed in the state where the services are

‘performed’. The ‘usage’ criterion is only associated

with royalty payments, and not with FTS payments,

the test for which relates to whether the services were

3 Outotec Gmbh v. DCIT, (2015) 172 TTJ 337 (Kolkata - Trib.).

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‘performed’ in one of the countries. In order to bring the

Assessee’s income to tax in India, it appears that the

ITAT has extended the IRA’s tax net beyond what is

contemplated in the second sentence of Article 12(5)

of the DTAA, without adducing reasons for taking such

a view. In effect, the ITAT has expanded the scope of

‘performance’ to include ‘usage’, whereas in a typical

service contract, the two are diversely different stages.

The application of this unduly broad ‘usage’ criterion to

levy tax on FTS takes away the special benet

envisaged for the residents of India and Finland under

the DTAA. In the absence of any other reported orders

interpreting this sentence of the India-Finland DTAA,

reliance on this judgment would not be advisable, and

one will have to wait for more judicial interpretations to

come out from the Courts to examine the real intention

of the special carve-out provision in this DTAA.

17

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NO WITHHOLDING TAX ON PAYMENTS MADE

FOR SERVICES RELATING TO GDR ISSUE

18

4In the case of Indusind Bank Ltd, the Bombay HC

held that the payment made to a non-resident towards

services in relation to issuance of Global Depository

Receipts (“GDR”) would not be taxable in India as

FTS, accordingly there would no requirement to

withhold tax.

FACTS

Indusind Bank Ltd. (“Assessee”), a scheduled bank

registered under the Banking Regulation Act, 1949,

proposed raise capital aboard, through issuance of

GDRs. The Assessee inter alia engaged Amas Bank

Ltd (“Banker”), being an entity incorporated in United

Arab Emirates, to render services as the global

coordinator and the lead merchant banker to the GDR

issue. Pursuant to the terms of engagement between

the Assessee and the Banker, the Assessee made

certain payments to the Banker towards the service

rendered in relation to the issuance of the GDRs,

without deducting any tax at source.

The AO was of the opinion that

services rendered in relation to GDR

issuance are in nature of FTS and

accordingly, tax was required to be

withheld by the Assessee on such

payments. While the CIT(A) upheld

the order of the AO, the ITAT set aside the CIT(A)’s

order and held that the said remuneration towards

services was not taxable in India and no tax was

required to be withheld by the Assessee. Being

aggrieved of the order of the ITAT, the IRA approached

the HC.

ISSUES

Whether the payments made to the Banker towards

services in relation to GDR issuance are in nature of

FTS and liable to tax withholding under Section 195 of

the IT Act?

ARGUMENTS

The Assessee argued that the services provided by

the Banker were not taxable in India, as the services

rendered by the Banker were not utilized or rendered

in India. The IRA on the other hand contended that

Section 9 of the IT Act, which deals with the accrual of

FTS in India, has been amended to provide that

whether the non-resident was resident in India and

had a place of business connection in India, or had

rendered services in India, would be inconsequential

in determining the taxability of FTS in India.

Accordingly, it was contended that the payment made

for the services were in the nature of FTS and

accordingly, the Assessee was liable to withhold tax

on the same.

DECISION

The Bombay HC at the very outset claried that as per

Section 9 of the IT Act, FTS would

not be taxable in the hands of a non-

resident taxpayer, if the resident

payer (i.e. Assessee) utilizes the

services, with respect to which FTS

is paid/payable, for business or

profession carried by it outside India

or for the purposes of earning

income from any source outside India. Accordingly,

the HC upheld the decision of the ITAT and held that in

the present factual matrix the payment made for the

services rendered by the Banker was not taxable in

India as FTS, as such services were not utilized in

India.

The HC also rejected the arguments adopted by the

IRA and claried that the concerned amendments to

Section 9 were aimed at de-linking the taxability of

FTS in India from factors such as whether or not the

non-resident had a business connection in India or

had rendered services in India, which is very different

from the service having been consumed/utilized in

“”

Service fees paid outside forservices obtained in relation to

GDR issue is not taxableas FTS in India.

4 CIT v. Indusind Bank Ltd TS-223-HC-2019 (Bombay HC).

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India. Accordingly, the HC reiterated that since the

services of the Banker were not used by the Assessee

for carrying on its business in India, payments made

for such services cannot be said to be accrue or arise

in India. The HC relied upon the SC decision of GE 5India Technology Center P. Ltd., wherein it was held

that the requirement to withhold tax under Section 195

of the IT Act would only arise only when the payment

was chargeable to tax in India and held that since the

payment made to the Banker was not taxable in India,

no tax was required to be withheld on the same.

SIGNIFICANT TAKEAWAYS

This decis ion of the HC c lar ies that the

aforementioned amendment to Section 9(1) of the IT

Act are merely claricatory in nature and the actual

test of accrual of FTS in India, continues to be whether

the services for which such FTS is paid, is being

utilized for the purposes of carrying on business or

profession in India or not. Further, it may also be noted

that the said judgement did not deal with the question

of whether the consideration paid for the services

rendered by the Banker as global coordinator and lead

merchant banker to a GDR issuance, would qualify as

FTS under the IT Act, which may have been a

pertinent factor in determining the taxability of

payments made to bankers in case of an issuance of

securities. However, in the case of Mahindra and 6

Mahindra, the ITAT special bench dealt with

the characterization of consideration paid to non-

resident lead bankers of a GDR issuance and the

tribunal held that management commission and

selling commission received by lead bankers was in

nature of FTS, while the underwriting commission

would not qualify as FTS since the underwriting

services are de hors any technical, managerial and

consultancy services.

5 GE India Technology Center P. Ltd v. CIT (2010) 327 ITR 456 (SC).6 Mahindra and Mahindra v. DCIT (2009) 30 SOT 374.

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DELHI ITAT HOLDS THAT CONSIDERATION RECEIVED

FOR PREPARATION OF DESIGN AND DRAWINGS

20

7In the case of PJSC Stroytransgaz, the Delhi ITAT

held that the share of revenue received by a non-

resident, as part of the consortium made for projects

executed in India, shall be treated as its business

income and not as royalty.

FACTS

PJSC Stroytransgaz (“Assessee”) is a Russian

company having a branch ofce in India. During the

relevant AYs (i.e. AYs 2004–05, 2005–06 and

2006–07), the Assessee participated in water supply

augmentation project and oil pipeline project, etc. As a

part of the water supply project, the Assessee entered

into a consortium with Essar Constructions and Indian

Oil Corporation to meet the requirement of technical

qualication. With the same consortium, the Assessee

also entered into a supplementary agreement for the

division of work, as per which the

Assessee was to provide project

management services. This was to

be provided by the branch ofce of

the Assessee and the Assessee

would provide specialist manpower

for undertaking these services.

Further, it was also agreed that the

Assessee would directly provide

technical expertise and technical know-how for an

amount of USD 10 million. Therefore, the revenue

from this project was bifurcated by the Assessee into

two parts, one in the nature of FTS, which was

received by the branch ofce of the Assessee, and the

other in the nature of royalty, which was received by

the Assessee for providing know–how and technical

expertise to the consortium.

The AO refused to treat the additional income received

by the Assessee as royalty but instead treated it as

business income in the hands of the Assessee. On

appeal to the CIT(A), the CIT(A) upheld the order of

the AO. Being aggrieved by the decision of the CIT(A),

the Assessee has led an appeal before the ITAT.

ISSUE

Whether the income received by the Assessee from

the consortium, for providing technical know-how and

expertise, was in the nature of royalty or business

income?

ARGUMENTS

The Assessee argued that the principal focus of

Assessee’s business (not that of its branch ofce) was

preparation of designs for construction of pipeline

systems. Therefore, the technical

know-how and expert ise in

relation to the project was to

be rendered by the Assessee

directly and in relation to that the

income earned by the Assessee

constituted royalty income only.

Further, the Assessee argued that the technical bid

preceded the nancial bid and the Assessee was

involved in the technical bid, therefore, the conclusion

of the IRA that the Assessee provided services at the

bidding stage only is an erroneous conclusion drawn

without understanding how the pipeline business

worked. For strengthening its argument, the Assessee

also relied on the decision of Delhi ITAT in the case of 8

Iveco Spa, wherein payment received by a non-

resident having branch ofce in India was treated as

“”

Share of the non-residentAssessee for services renderedas a part of consortium would constitute business income.

WOULD BE CONSIDERED AS BUSINESS INCOME,

AND NOT ROYALTY, WHEN THERE IS A PE IN INDIA

7 PJSC Stroytransgaz v. Deputy Director of Income Tax, Circle 2(2), New Delhi; [2019] 106 taxmann.com 114 (Delhi- trib.).8 Iveco Spa v. ADIT (IT); [2016] 160 ITD 348.

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royalty and not as business income.

On the contrary, the IRA argued that the Assessee was

one of the partners in all of the projects executed in the

year. As the Assessee was a part of the consortium,

royalty payment received by it amounted to paying

royalty to oneself. According to IRA, the matter of fact

is that the Assessee received its own share of income

from the projects executed during the year and it

chose to bifurcate such income into FTS for branch

ofce and royalty for itself. There was no “transfer” of

technical know-how. Moreover, the fact that branch

ofce constituted PE of the Assessee has not been

disputed by the Assessee at all. Thus, entire payment

received by it has to be attributed to the PE in India and

accordingly, ought to have been taxed as business

prot, and Article 12 of the DTAA was not applicable.

The bifurcation of revenue received by the Assessee

into FTS and royalty was irrelevant as per IRA.

DECISION

The ITAT concluded the case in favour of IRA by

holding that the Assessee being a member of

consortium cannot pay royalty to itself and the

payment received by it cannot be bifurcated into

royalty and FTS, but has to be attributed to the PE of

the Assessee and shall be subject to tax accordingly.

Insofar as the judicial precedent relied on by the

Assessee was concerned, the ITAT held that in the

said case, the branch ofce was only rendering liaison

services and did not participate in any revenue

generating activities including activities, payment for

which was treated as royalty by the Assessee.

Therefore, no income was attributable to the branch

ofce of non-resident.

SIGNIFICANT TAKEAWAYS

The ITAT did not agree with the contention of the

Assessee that the income earned by it through its

Project Ofce ought to be bifurcated into Royalty and

FTS and part of the income received outside India

should not be chargeable to tax in India and held that

the entire income ought to be attributed to the PE in

India. It also did not make any attempts of delving into

attribution of income to the PE and decided the case in

favour of IRA by holding that the Assessee cannot pay

royalty to itself.

It appears that the ITAT got carried away by the clause

forming part of Article 7 of most of the DTAAs executed

by India which provide that in determining the prots of

the PE, royalties paid to the head ofce by the PE

should not be taken into account. It must be noted that

royalties, in the instant case, were not paid by the

branch ofce but by the project owner who has

assigned the contract of pipelines to the consortium.

Even otherwise, it is worthwhile to note that India-

Russia DTAA does not have a similar case i.e. Article

7 of the India-Russia DTAA does not provide that

royalties paid by the PE to the head ofce should not

be taken into consideration. Therefore, the decision of

the ITAT to this extent is questionable.

It is a general practice to unbundle the EPC

contract into three different parts viz. preparation of

design and drawings; supply of materials; and

construction / execution of the project. Out of these

three activities, preparation of design and drawings

would not be subject to tax in India if the same is

supplied to India as a product (i.e. the project owner

should not have right to exploit the intellectual property

commercially but only use it for the contract in

question) and in cases where the project owner

reserves the right to commercially exploit it, the same

could be construed as royalties. In the instant case, it

is not clear whether the project owner reserved any

such right. Even if such right was retained by the

project owner, the same could only be construed as

royalty in the hands of the Assessee but should not

form part of the business income of the Assessee,

especially when the agreement specically divides the

consideration to be paid for such preparation of

designs/drawings and when the same is rendered

entirely from outside India. This proposition has been

conrmed by multiple decisions, including the Delhi 9

HC in the case of Linde AG . Therefore, the instant

decision of the ITAT can be construed to have taken an

aggressive position against the tax payer.

9 Linde AG, Linde Engineering Division & Anr v. DDIT in W.P. (C) NO. 3914/2012 & CM No.8187/2012.

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CASE LAW UPDATES

- DIRECT TAX

- TRANSACTIONAL ADVISORY

CASE LAW UPDATES

22

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RECEIPT OF SHARE APPLICATION MONEY RELEVANT

FOR TRIGGER OF SECTION 56(2)(VIIB) OF THE IT ACT

23

The Kolkata ITAT in the case of M/s Diach Chemicals 10& Pigments Pvt. Ltd, held that the application of

Section 56(2)(viib) of the IT Act would be triggered on

the date of receipt of application money for shares,

and not on the date of allotment of shares.

FACTS

Diach Chemicals & Pigments Pvt. Ltd (“Assessee”)

proposed to issue equity shares at a premium in FY

2011-12 and the received the share application money

for such shares in the same FY. However, the shares

were actually allotted in FY 2012-13. The AO

observed that the shares were issued for a price in

excess of the FMV of the shares and accordingly,

bought the excess amount of premium received by the

Assessee (i.e. the issue price less the FMV of the

shares) to tax, in its hands under Section 56(2)(viib) of

the IT Act. In appeal, the CIT (A) concurred with

argument of the Assessee and held that since Section

56(2)(v i ib) of the IT Act was

introduced with effect from FY 2012-

13 and the consideration for the

shares was received in FY 2011-12,

therefore, the provisions of Section

56(2)(viib) of the IT Act would not

apply in the instant case. Aggrieved

of the order of the CIT (A), the IRA

approached the ITAT.

ISSUES

Whether Section 56(2)(viib) of the IT Act, which came

into effect from FY 2012-13, would apply to shares for

which the share application money was received in FY

2011-12, while the shares were allotted in FY 2012-

13?

ARGUMENTS

The IRA argued that since the transaction was

completed in FY 2012-13 in which the shares were

allotted, the applicability of Section 56(2)(viib) should

be determined in such year. The IRA also placed

various evidences on record to show that a part of the

consideration for the shares was also received in FY

2012-13. Accordingly, it was argued that since money

was also received in the year in which Section

56(2)(viib) came into effect, the same should be

applicable.

On the other hand, the Assessee argued that since no

consideration was received in the relevant FY i.e.

2012-2013, therefore, Section 56(2)(viib) was not

applicable in the instant case.

DECISION

The ITAT noted that as per Section 56(2)(viib) of the IT

Act the year under consideration for

determining the applicability of the

said section is the year in which the

consideration for issue of shares is

received and the year in which

shares are allotted would not be

relevant. Thus, ITAT held that since

the consideration for issue of shares

i.e. the share application monies was received in FY

2011-2012, and the Section 56(2)(viib) became

effective from FY 2012-13, Section 56(2)(viib) would

not be applicable in the instant case.

SIGNIFICANT TAKEAWAYS

This judgement provides a much needed relief for

taxpayers who have been litigating this issue before

the lower tax authorities. However, this judgment may

sought to be distinguished by tax authorities on the

“”

Section 56(2)(viib) is triggeredin the year in which

share application moneywas received.

10 ACIT v. M/s Diach Chemicals & Pigments Pvt. Ltd ITA No. 564/Kol/2017 (Kolkata ITAT).

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premise that the ITAT did not rule on merits relating to

the share application being split in both FY 2011-12

and FY 2012-13. Additionally, the Delhi ITAT in the 11case of M/s Cimex Land and Housing Pvt. Ltd., in a

similar fact pattern has rendered a contrary

judgement. The Delhi ITAT held that though the share

application money was received in the year in which

Section 56(2)(viib) of the IT Act was not applicable, but

the fact that the shares were actually allotted in the

year in which Section 56(2)(viib) of the IT Act, was

applicable would make the taxpayer liable to justify the

valuation under the said section.

This contrary decision may add to the woes of the

taxpayers litigating this issue and one would have to

wait for a higher court to clarify the issue of time at

which applicability of provisions of Section 56(2)(viib)

of the IT Act should be tested.

11 M/s Cimex Land and Housing Pvt. Ltd. v. ITO ITA No. 5933/Del/2018 (Delhi ITAT).

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AMOUNTS PAID TOWARDS DISCHARGE OF MORTGAGE

OBLIGATION IN CONNECTION WITH A PROPERTY –

NOT COST OF ACQUISITION

12The Madras HC in the case of D. Zeenath, held that

monies paid towards discharge of mortgage in relation

to a property, created by the taxpayer himself/herself,

will not be regarded as the cost of acquisition of such

property.

FACTS

Smt. D. Zeenath (“Assessee”), along with two other

individuals, had purchased a land. The said land was

mortgaged by deposit of title deed, to secure a loan

obtained by M.O. Hassan Kuthos Maricar Pvt. Ltd.

(“Borrower”) from the State Bank of India (“Bank”)

and the Assessee and co-owners of the land, stood as

guarantors for the said loan.

Since the loan was not repaid, the Assessee and co-

owners of the land consented to sell the property to a

third party buyer and paid the consideration from the

sale towards the settlement of the loan.

The Assesse, in response to a notice issued by the

AO, claimed that she was not

liable to pay any capital gains

on the sale of the land, as the

entire consideration from the sale

was paid towards the repayment

of loan, which amounted to

diversion of income. The AO

rejected the claim of the Assessee

and held that the use of proceeds

from the sale towards payment of loan merely

amounted to application of income and accordingly,

the Assessee was liable to capital gains taxes. In

appeal, the CIT(A) and the ITAT upheld the order of the

AO. The Assessee being aggrieved of the said orders,

approached the HC.

ISSUE

Whether in the facts and circumstances of the case,

the Assesse was liable to pay tax on the gains arising

from the sale of land?

ARGUMENTS

The Assessee argued that she was not liable to pay

any tax on the gains arising from the sale of land, as

the proceeds of such sale were diverted towards the

settlement of loan and no income accrued to her.

Further, the Assessee also contended that the amount

received from the sale of land should be added to the

cost of acquisition of the land as it paid towards

clearing the title of the assets i.e. the land which had

been mortgaged to the Bank.

On the other hand, the IRA argued that the Bank had

no independent authority to alienate the land and the

Assessee and the co-owners of the property had

consented to sell the property for discharging the loan.

Accordingly, it was asserted that it

was only application of income

and not diversion of income.

Further, the IRA relied upon

various case laws to contend that

where the transferor creates a

charge on a property after

acquiring the same, the amounts

paid to clear such charge would

not be included in the cost of acquisition of the

property.

DECISION

The Madras HC observed that the mortgage was

created by deposit of title deeds and held that by such

a mortgage the Bank would not even acquire the title in

”“Amount paid to clear a charge on

asset, created by the transferorhimself after acquiring the asset,shall not be included in the cost

of acquisition of the asset.

12 D. Zeenath v. Income Tax Ofcer (2019) 263 taxman 69 (Madras HC).

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a property, much less an overriding title. Accordingly,

the HC rejected the argument of the Assessee and

held that the co-owners voluntarily sold the property

for discharging the loan and it was only an application

of sale proceeds, rather than a diversion income.

Further, the HC inter alia placed reliance on the 13

Supreme Court decision of R.M. Arunachalam,

where the court had held that payment towards

discharge of a mortgaged property would be

considered to be part of the cost of acquisition of such

property where the mortgage had not been created by

the taxpayer, but was created by the person from

whom the taxpayer had acquired the title and the

mortgage was subsisting at the time the title was

acquired by the taxpayer. Accordingly, the HC held

that in the instant case, the Assessee had herself

mortgaged the property, therefore, any payment made

by her for the discharge of property is not to clear the

title over the property but merely to clear the interest or

charge over the property. Thus, the HC held that such

payment could not be included in the cost of

acquisition and upheld the order of the lower

authorities.

SIGNIFICANT TAKEAWAYS

This decision claries the position that only payment

made towards clearing the title of a property at the time

of purchase of the property may be included in the cost

of acquisition, however payments made towards

clearing a charge on the property created by the

transferor itself cannot be included.

While the judgment has been rendered only in the

context of mortgage of property and discharge of loan

by a guarantor, the principle enunciated above would

apply equally in relation to debt restructuring, involving

sale of property to discharge a debt, undertaken in

relation to nancially distressed companies or

restructuring proposed under resolution plans of

Insolvency and Bankruptcy Code, 2016.

Further, it is a settled position that in order to construe

a particular receipt as diversion of income by

overriding title, the income should have been diverted

before it reaches the tax payer. While there would be

certain obligations on every case, but the nature of

obligation is the decisive factor to determine the

diversion of income. Legal obligation to pay out the

lenders upon the sale of mortgaged property is just an

application of the income received since the property

was mortgaged to borrow certain money which was

utilized by the borrower. Therefore, the obligation to

pay out the lenders arises from the default in

repayment of mortgage amount and not from the sale

of assets.

13 R.M. Arunachalam v. CIT (1997) 227 ITR 222 (SC).

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BOMBAY HC HAD HELD ADDITION UNDER SECTION 68

OF THE IT ACT CANNOT BE MADE MERELY DUE TO

14 PCIT v. Aditya Birla Telecom Ltd. in IT Appeal No. 1502 of 2016.

27

14In the case of Aditya Birla Telecom Ltd., the

Bombay HC held that large investments coming

through multiple corporate entities would not make a

transaction a sham transaction by itself and rejected

IRA’s plea that the investment was made through a

‘complex web of transactions’.

FACTS

Aditya Birla Telecom Ltd (“Assessee”) is an Indian

listed company and is engaged in the business of

providing telecommunication services. During the

scrutiny proceedings for AY 2009-10, the AO noticed

that the Assessee had issued 1,925,000 preference

shares at INR 10,890 per share to P5 Asia Holding

Investment (Mauritius) Ltd. (“P5 Mauritius”) where

each share had a face value of INR 10. By virtue of this

allotment of shares, the Assessee had received the

share amount of INR 19,250,000 and total premium of

INR 20.963 billion.

P5 Mauritius was entitled to dividends at the rate of

0.00001% per annum on the face value of the

preference shares. Upon completion of period of ten

years of issuance of preference

shares, the same would be converted

into equity shares at a premium of

INR 10,890 per share. The AO noted

that the Assessee's holding company

is Idea Cellular Limited (“Idea”) and

its nominee owned 10,000,000 equity

shares of INR 10 each and held that

the Assessee had received share

capital towards preference shares from P5 Mauritius

at terms which were so adverse to P5 Mauritius, that

no prudent businessman would agree to subscribe to

preference shares on such terms. Therefore, the AO

had concluded that the subscription of preference

shares by P5 Mauritius is a colourable device and not

a genuine transaction and should be taxed in the

hands of the Assessee under Section 68 of the IT Act,

based on the following ndings:

• The Assessee had utilized only INR 73.1 Million,

of the total INR 20 Billion (approximately)

received from P5 Mauritius, for its business

purposes and the rest of the money was

transferred to its parent entity, Idea, and its other

group companies for the purpose of other

investments;

• The Assessee is entitled to a meagre dividend of

0.00001% on the total investments made;

• The Assessee had failed to produce the

assessment order of P5 Mauritius; and

• The Assessee had opened bank account in

HSBC only for receipt of funds from P5

Mauritius, which was closed shortly after the

transfer of funds.

The CIT(A) upheld the order of the

AO by citing paucity of time, since

the HC while adjudicating the stay of

recovery proceedings, had provided

3 months’ time to the CIT(A) to

complete the appeal proceedings.

In the second appeal, the ITAT had

veried the documents submitted by

the Assessee to establish the identity, genuineness

and creditworthiness of P5 Mauritius and concluded

that the P5 Mauritius is a company belonging to the

LARGE INVESTMENTS MADE THROUGH AN

INVESTMENT VEHICLE

”“The transaction cannot be

construed as a colorabledevice merely because large

investments were made through a Mauritius entity.

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Providence Equity Partners ("PEP"), a global private

i nves tmen t g roup spec ia l i z i ng i n med ia ,

entertainment, communication and information

companies, managing funds of USD 22 billion and

having investments in over 100 companies spread

over 20 countries. P5 Mauritius has registered itself as

a Foreign Venture Capital Investor ("FVCI") with the

Securities and Exchange Board of India ("SEBI"). The

investment in compulsorily convertible preference

shares of the Assessee was made after P5 Asia

registered as a FVCI with SEBI and after having

obtained the necessary approvals from the FIPB. In

view of the same, the ITAT held that all the three

ingredients of Section 68 of the IT Act (i.e. identity,

genuineness and creditworthiness of investor) are

duly established and therefore, addition made under

the said provision should be deleted.

Aggrieved against the same, the IRA preferred an

appeal before the HC.

ISSUES

Whether the amount received by the Assessee, on

account of issuance of preference shares, was a

colorable transaction and should be included in the

total income of Assessee under Section 68 of the IT

Act?

ARGUMENTS

The IRA argued that the AO had examined the facts

thoroughly and arrived at a conclusion that the entire

transaction was not genuine since the Assessee had

merely routed its own money through a complex web

of corporate structures. It was further contended by

the IRA that there is no commercial rationale for

investing such huge sums of money through a shell

company for such a meagre return on investments i.e.

dividend.

On behalf of the Assessee, it was contended that the

AO had proceeded entirely on erroneous basis and

that the funds were raised through share subscriptions

on account of the cellular licenses obtained for

providing telecommunication services in Bihar and

Jharkhand blocks. Further, the investment was made

by a leading US based private equity investor, PEP,

through a specially constituted Mauritius based

investment vehicle i.e. P5 Mauritius. Moreover, the

requirement of issuing shares at such high premium

was obvious as the shareholders of the Assessee did

not want to lose the majority stake in the Assessee

company.

The Assessee also submitted that the AO had veried

the source of such funds and adverse nding was

pointed out by the AO. Addition under Section 68 of the

IT Act should not be made merely because a huge

investment was made through an investment vehicle

based out of Mauritius and that receipt of dividend is

not the only form of return of investments for an

investor. In order to establish that the transaction was

not a colorable device, the Assessee further added

that P5 Mauritius had subsequently sold the

investments and made sizeable prots from such sale.

DECISION

The HC held that the primary onus to establish

genuineness, creditworthiness and identity of the

payer and the source of funds would be on the

Assessee. In the instant case, P5 Mauritius made

investments after obtaining approvals from FIPB

wherein full details of investment, the transaction,

terms of the agreement and the identity of the investor

as well as the group was provided. The HC had noted

that ITAT had veried the nancial statements which

disclosed the ow of funds in P5 Mauritius and held

that merely because multiple entities were involved in

the transaction process, the AO cannot make adverse

inference regarding the nancial capacity of P5

Mauritius. It was further held that an investor does not

only look for dividends but also expects returns on

such investment through capital appreciation, when

the investment nally gets converted into equity

shares.

The HC held that full enquiry of source of funds and

other relevant factors in relation to the investment in

question was elaborately carried out by the AO as well

as the ITAT. Therefore, while the initial suspicion of the

AO could be justied, but when all the relevant factors

were properly explained, including the fact that

payment of dividend was not the sole attraction for the

investor and that the investor could expect a fair return

on investment through capital appreciation also, the

AO should have adverted to all such materials on

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record in proper perspective. Merely because multiple

entities were involved in the entire process of

accumulating funds in P5 Mauritius, then investing in

the Assessee by itself would not be sufcient to

establish a sham transaction or colorable device.

SIGNIFICANT TAKEAWAYS

Routing of investments through Special Purpose

Vehicles (“SPVs”) is an established practice and in the

instant case, the IRA had made an unwarranted

addition under Section 68 of the IT Act by questioning

the said practice. The instant addition was made by

the AO only on the basis that there were multiple

entities involved in routing the money to Assessee and

a large sum of money was received by the Assessee

through issue of shares to an investor. Therefore, the

HC rightly deleted the additions made under Section

68 of the IT Act.

It must be noted that the AO questioned the

commercial rationale of the transaction by alleging

that no prudent businessman would agree to

subscribe to preference shares which promises a

dividend of 0.00001%. The requirement to establish

the commercial rationale could not be invoked for the

purposes of Section 68 of the IT Act but only for the

purposes of invoking General Anti-Avoidance Rule,

which became applicable only from the April 1, 2017

and did not apply to year in which the instant

transaction took place. Further, investment in shares

by residents where the primary subscription takes

place at a high premium can also be taxed in the hands

of the company receiving such investments under

Section 56(2)(viib) of the IT Act, if the quantum of

premium cannot be justied by way of a valuation

report. Therefore, transactions in the nature of share

subscriptions should be undertaken after considering

the applicable law relating to share premium and

requirement of commercial rationale.

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MADRAS HC DISMISSES COGNIZANT'S WRIT OVER

SHARE BUY-BACK CHARACTERIZATION

15 Cognizant Technologies Solutions India (P) Ltd. v. Deputy Commissioner of Income-tax; [2019] 106 taxmann.com 388 (Madras).

30

15In the case of Cognizant Technologies, the HC

dismissed the appeal of Assessee against the order of

AO characterizing remittances made to shareholders

under buy-back scheme, as remit tance of

accumulated prots to be categorised as dividends to

shareholders.

FACTS

Cognizant Technologies India (P) Ltd. (“Assessee”) is

a private company incorporated under Companies

Act. In 2013, the Assessee had undergone a buy-back

of its own shares. Thereafter, in 2016, under Scheme

of Arrangement and Compromise (“Scheme”), the

Assessee proposed another buy-back of 9,400,534

equity shares for a consideration of INR 190.80 Billion.

The Scheme was approved by the Madras HC in April,

2016.

The capital gains arising in the hands of the

Assessee’s shareholders as a result of buy-back was

offered to tax by the shareholders subject to treaty

benets and a total of INR 8.98

Billion of capital gains tax was paid.

In 2017, the IRA attempted to tax

the receipts of buy-back of 2013 in

the hands of the Assessee’s

shareholders as income from other

sources. Given the same, the

Assessee led an application

before the AAR for the buy-back

proposed in 2016.

However, in 2018, the IRA passed an order asking the

Assessee to pay Dividend Distribution Tax (“DDT”),

under Section 115-O of the IT Act, at 15% on

remittance of INR 1.94 Billion to its shareholders in

May 2016. Against this order, the Assessee has led a

writ before the Madras HC in 2018.

ISSUES

• Whether a show cause notice or an enquiry is

required for passing an order in relation to

Section 115-O of the IT Act?

• Whether there has been a breach of principles

of natural justice because of such order being

passed by the AO?

• Whether Section 245RR of the IT Act prohibits

the AO from passing any order in relation to the

transaction for which an AAR has already been

led?

• Whether the writ led by the Assessee against

the order of the AO is maintainable?

ARGUMENTS

The Assessee argued that an application in relation to

the transaction has already been led before the AAR

under Section 245Q of the IT Act. Section 245RR of

the IT Act states that no income-tax authority or ITAT

can proceed on any issue in relation

to which an application has been

led before the AAR under Section

245Q of the IT Act. Further, as per

the Assessee, no show cause

notice was issued to the Assessee

in relation to DDT which was in

violation of principles of natural

justice.

Countering the arguments of the Assessee, the IRA

responded saying that the Assessee had remitted an

amount of INR 1.94 Billion to its non-resident

shareholders in May, 2016, on which no DDT was

paid. Once this remittance came to the notice of IRA, a

letter was issued to the Assessee by the IRA in

November, 2017 asking details of various remittances

made to the shareholders by the Assessee during FY

“HC dismisses Assessee’ s writagainst the order of AO

demanding DDT on remittancesmade under buy-back scheme and

holds that the matter shouldbe decided through the

normal appellate process.

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2015-16 and 2016-17. Further, IRA also relied on

Section 245R(2) of the IT Act which stated that the

AAR shall not take cognizance of an application,

where the questions raised in the application are

already pending before IRA. The IRA also contended

that the buy-back scheme proposed by the Assessee

is nothing but a means to distribute accumulated

prots by the Assessee and therefore the remittances

have to be treated as dividends under Section 2(22)

(d) of the IT Act. The IRA, in this regard, contended

that there was no dispute or necessity to le a petition

for approval of the Scheme under Section 391 to 393

of the IT Act. Hence, 15% tax must be paid by the

Assessee under Section 115-O of the IT Act. Lastly,

the IRA contended that Section 115-O of the IT Act

does not prescribe any specic order to be passed. It

is self-declaratory and the taxpayer is required to remit

the taxes on its own and any failure on the part of the

Assessee to do the same would render the Assessee

in default and the IRA can commence the recovery

measures.

In the rejoinder afdavit led by the Assessee, the

Assessee contended that the letter received from IRA

in November, 2017, did not have any reference to

Section 115-O of IT Act. Further, the Assessee has

duly responded to the said letter. The Assessee

admitted that there were informal discussions and

meetings between the Assessee and the IRA but that

could not be a substitute to a show-cause notice from

IRA. The Assessee argued that the buy-back of 2016

was happening under the Scheme under Section 391

to 393 of the Companies Act, 1956. However, prior to

its amendment in June, 2016, explanation to Section

115QA of IT Act limited the denition of buy-back to

that undertaken under Section 77A of Companies Act,

1956. Since the Assessee had undertaken the buy-

back prior to the June 2016 amendment, the aforesaid

buy-back of 2016 did not fall under the provisions of

buy-back under Section 115QA of the IT Act. Further,

as per Section 46A of IT Act, buy-back shares is

considered as a capital gain. Thus, on buy-back of

shares from non-resident shareholder from US, the

US shareholder had paid a capital gain tax of INR 8.98

Billion. The other non-resident shareholder was from

Mauritius and entitled to exemption under India-

Mauritius DTAA. Therefore, due to benet of DTAA, no

tax was payable by such shareholder. Lastly, due to

applicability of Section 245RR of IT Act, the order

passed by the IRA was not valid.

On the other hand, the IRA also raised a preliminary

objection on the maintainability of the writ petition

stating that the Assessee had an effective alternative

remedy. Further, the IRA added that as per Section

2(22)(d)/ 2(22)(a) of the IT Act, any reduction in share

would amount to distribution of dividend and the

domestic company is liable to pay DDT on the same.

Non-compliance with the same would render the

Assessee as “assessee-in-default”. There is no

requirement of issuing notice or conducting an inquiry.

Lastly, the IRA argued that when the Scheme was

approved, it was observed in the order that approval

would not be considered as order granting exemption

from payment of statutory dues.

DECISION

On the rst issue of whether Section 115-O of the IT

Act mandates passing of any show-cause notice or

enquiry before passing an order, the HC held that

Section 115-O is a charging provision in itself and

does not require any show-cause notice to be

separately issued. While there are provisions for tax

assessments which require issue of notice, Section

115-O is a special provision where the Assessee has

to suo-moto pay tax within a specied time period.

There is no requirement on the AO to issue notice

before holding the assessee in default under these

provisions.

On the second issue of breach of principles of natural

justice, the HC responded saying that it is established

that a show-cause notice is not required under Section

115-O of IT Act. Despite the same, a letter was issued

to Assessee asking for information on the foreign

remittances made by the Assessee post which

discussions were also entered into by Assessee. The

HC held that the stand taken by Assessee, that the

letter issued by the IRA does not amount to a proper

show-cause notice, is incorrect. As per the HC, the

purpose of issuing a show-cause notice is to give a

notice the actions that tax authorities proposes to

initiate. Given the same, even the argument of the

Assessee, that there was a violation of principles of

natural justice, does not hold substance as per the HC.

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On the third issue, the HC observed that the

application before AAR was led in March, 2018 when

the issue was pending before the AO. Section 245R

(2) clearly states that if the enquiry is pending before

the IRA an application before the AAR cannot be led

on the same issue. Thus, the AAR had no jurisdiction

to entertain the application led by the Assessee

under Section 245Q of the IT Act. Consequently, the

order passed by the AO also does not face any bar

under Section 245RR of the IT Act.

On the last issue of maintainability of the writ petition,

the HC held that rstly, there is no merit in the

argument of the Assessee that the remittances made

subsequent to buy-back of shares were to be treated

as capital gain and not dividends. Secondly, the HC

found merit in the argument of the IRA that every

assessee who denies its liability to pay taxes can le

an appeal under Section 246 of the IT Act. In this

regard, the HC placed reliance on the SC judgement in

the case of Central Provinces Manganese Ore Co. 16

Ltd., and few other judgements which state that

Section 246(c) of the IT Act provides for appeal

against any order where the assessee denies its

liability to be assessed under the IT Act or against any

assessment order. Given the same, the HC held that

the Assessee did have an alternate remedy by way of

appeal under Section 246 of the IT Act and the writ was

led to bypass the said appeal remedy. Therefore, the

writ petition led by the Assessee was held as not

maintainable by the HC.

SIGNIFICANT TAKEAWAYS

One of the contentions of the Assessee was that the

denition of “buy-back” under Section 115QA of the IT

Act, prior to 2016, restricted the meaning of buy-back

to purchase of its own shares undertaken by the

Company under Section 77A of the Companies Act,

1956. This denition was widened through Finance

Act, 2016, to include buy-back undertaken under any

law. This was done to address the anomaly in law

which allowed companies to circumvent buy-back tax

by undertaking buy-back under provisions other than

Section 77A of Companies Act, 1956.

On the other hand, Section 2(22) of the IT Act denes

the term “dividend” and also provides an exhaustive

list of exclusions from the term “dividends”. One of the

exclusions under sub-clause (iv) of Section 2(22)

states that any payment made by a company of its own

shares from a shareholder under Section 77A of

Companies Act, 1956 [which has now been amended

to Section 68 of Companies Act, 2013]. Thus,

remittance made by company on account of buy-back

of shares should not be considered as dividend and

accordingly, DDT cannot be imposed on the same.

However, while for applicability of buy-back tax, a

wider denition of buy-back has been used, whereas

for exclusion from purview of dividend, only buy-backs

undertaken under specic provision has been

excluded. This would give a leeway to the tax

authorities to treat remittances for buy-back

undertaken under any other provision, as distribution

of accumulated prots, and accordingly impose DDT

on the same along with the buy-back tax, leading to

double taxation. In order to prevent misuse of the

anomaly by the IRA, amendment akin to the 2016

amendment may be required.

Alternatively, it may be pertinent to note that CBDT 17

had issued a Circular in 2016 clarifying that

consideration received on buy-back of shares during

April 01, 2000 to May 31, 2013 would be treated as

capital gains in the hands of recipient shareholder

under Section 46A of the IT Act. Such amount would

not be treated as dividend on account of sub-clause

(iv) of Section 2(22) of the IT Act. Similar clarication

maybe required from CBDT, in order to prevent double

taxation in the hands of Assessee, as DDT as well as

buy-back tax.

16 Central Provinces Manganese Ore Co. Ltd. v. Commissioner of Income Tax (1986) 27 Taxmann 275 (SC).17 Circular No. 3/2016 dated February 26, 2016.

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MUMBAI ITAT HOLDS BUY-BACK OF FCCB AT

DISCOUNTED PRICE NOT BUSINESS INCOME

33

18 In the case of M/s. Pidilite Industries Ltd., the

Mumbai ITAT held that the buyback of FCCB at a

discounted price did not constitute business income of

the Assessee as the gain was in the nature of capital

receipt and not revenue receipt.

FACTS

M/s. Pidilite Industries ltd. (“Assessee”) is a company

resident in India and is engaged manufacturing of

adhesives. For AY 2010-11, the Assessee led its

return of income declaring income of INR 1.20 Billion.

However, after the scrutiny assessment of the

Assessee, the AO determined the total income at INR

2.23 Billion, wherein inter alia an

addition of INR 21.3 Million on

account of discount received on

Foreign Currency Convertible

Bonds (“FCCB”) buy-back. During

FY 2007-08, the Assessee issued

zero coupon FCCB mainly for

capital expenditure and funding international

acquisition. The size of FCCB was USD 40 million and

denomination of each bond was USD 100,000. On

maturity, the FCCBs were to be redeemed at a

premium of 39.37% of the issue price. The net

proceeds of approximately USD 39 million was partly

used for investment in foreign subsidiaries and partly

for ongoing capitalization programs. Thereafter, the

Assessee sought permission from RBI to buy-back the

FCCB and once the permission was granted by RBI,

the Assessee bought back 17 bonds at a discount of

25%, thereby earning a total discount of USD 425,000

which in Indian currency amounted to INR 21.3 Million.

On this discount, the Assessee claimed deduction

while computing its business income stating that the

same is in the nature of capital receipts. However, AO

disallowed the deduction claimed by the Assessee

and treated it as income under Section 28(iv) of the IT

Act. In this regard, the AO relied upon the decision of 19 Bombay HC in the case of Solid Containers.

Against the order of the AO, the Assessee led an

appeal before the CIT(A) and the CIT(A) decided in

favour of the Assessee by holding that the discount on

FCCB cannot be treated as gains as envisaged under

Section 28(iv) of the IT Act. The CIT(A) observed that

as per RBI circular, the proceeds of FCCB could be

used only for purpose of import of capital goods, new

projects, expansion and modernization or overseas

direct investment in joint ventures/ wholly owned

subsidiaries and expressly prohibits the usage of

FCCB proceeds for working capital, general corporate

purpose and repayment of rupee

loans. The CIT(A) observed that

s ince the Assessee was not

engaged in the business of giving

and taking loans through debt

instruments, the reduction in loan

liability could not be said to be on

account of appellant’s business or

profession. Further, CIT(A) relied on the decision of 20

Bombay HC in the case of Bombay Gas Co., to state

that waiver of loans for acquiring capital assets would

be on capital account and considering that the bonds

were not used for trading purposes, discounts on

repurchase could not be treated as gains. The CIT(A),

therefore, proceeded with the deletion of addition

made by the AO.

Against the order of CIT(A), the IRA preferred an

appeal before the ITAT.

ISSUES

Whether discount on the buy-back of FCCB

constituted gains under Section 28(iv) of the IT Act and

should be considered while calculating business

income?

”“Discount on buy-back of FCCBs

taken for capital purposes isnot a revenue receipt.

18 DCIT v. M/s Pidilite Industries Ltd.; ITA Nos. 7351 & 7352/ Mum/ 2017.19 Solid Containers v. DCIT, 178 Taxmann 192.20 Bombay Gas Co. Ltd. v. ACIT, ITA Nos 646 and 1188 of 2009.

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ARGUMENTS

The Assesse contended that the while the buy-back of

FCCB did happen at a discounted price of 25%, the

proceeds from these FCCBs were initially utilized

partly for investment in foreign subsidiaries and partly

for ongoing capitalization programs. Further, the RBI‘s

terms for issue of bonds prohibit utilization of proceeds

from trading purposes. Therefore the gains made by

the Assessee were on the capital account only.

The IRA on the other hand contended that Section 28

of the IT Act deals with what constitutes prots and

gains for business and profession and clause (iv) of

the said Section considers value of any benet or

perquisite, whether convertible in money or not,

arising from the business, as business income. Given

the same, the benet derived by the Assessee in

buying back the FCCB at discounted price amounts to

gain as per Section 28(iv) of the IT Act.

The Assessee further contended that the gain under

Section 28(iv) of the IT Act has to be in some form

other than in money and in this regard placed reliance

on the SC decision in the case of Mahindra and 21 Mahindra Ltd.

DECISION

The ITAT held that the gains arising from buying back

the FCCBs at discount cannot be considered revenue

receipts but only as capital receipts since these

FCCBs were issued to raise money for capital

expansion purposes but not for trading purposes. The

ITAT also decided that the decision of the SC in the

case of Mahindra and Mahindra squarely applies to

the factual matrix of the Assessee.

The ITAT further observed that similar view has been

taken by the Bombay HC in the case of Xylon 22

Holdings Pvt. Ltd., and in the case of Santogen 23

Silk Mill.,s .

Therefore, the appeal of the IRA on this issue was also

dismissed.

SIGNIFICANT TAKEAWAYS

The issue of reduction of loan liability can be

considered as income in the hands of borrower has

been a subject matter of litigation for a long time now, 24

until the SC in the case of Mahindra and Mahindra,

had put a pull stop. While Section 41 of the IT Act

provides that any allowance/reduction in the trading

liability would be considered as income in the hands of

the borrower, the confusion arose in cases where the

loans were obtained for capital purposes (i.e. not a

trading liability but a capital liability). The IRA was

increasingly bringing the reduction in the capital

purposes loan under the ambit of Section 28(iv) of the

IT Act which provides that any benet or perquisite

arising from a business would be considered as

income from business. The HCs were divided on the

issue of whether the reduction in the capital purposes

loan can be taxed in the hands of borrower.

Last year, the SC in the case of Mahindra and 25

Mahindra, had held categorically that reduction in

capital purpose loan could only be construed as

capital receipts and not a revenue receipts and

accordingly, the same cannot be taxed in the hands of

borrower. In the instant case, FCCBs were issued by

the Assessee for investment in foreign subsidiaries

and capital expansion purposes and therefore, the

same was rightly considered as capital purpose loan

and the addition made by the IRA was deleted.

The said decision of SC can be said to have given

timely relief to many of the loss-making entities which

are under liquidation as per the Insolvency and

Bankruptcy Code, 2016 since in almost all such cases,

lenders were required to take a haircut on their loan

amount, and the treatment of resultant reduction in

loan liability as income would have created an

unwarranted burden not just to the borrowing

company but also to the lenders since the extent of

haircut would be determined based on the tax liability

of the company.

21 CIT v. Mahindra and Mahindra Ltd.; 93 Taxmann.com 32.22 CIT v. Xylon Holdings Pvt. Ltd.; 211 Taxmann.com 108.23 CIT v. Santogen Silk Mills; 57 Taxmann.com 208.24 CIT v. Mahindra and Mahindra Ltd.; 93 Taxmann.com 32.25 CIT v. Mahindra and Mahindra Ltd.; 93 Taxmann.com 32.

34

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- MISCELLANEOUS

CASE LAW UPDATES

35

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BANGALORE ITAT TREATS CUSTOMER RELATIONSHIP

RIGHTS AS GOODWILL ELIGIBLE FOR DEPRECIATION

36

In the case of M/s. Incap Manufacturing Services 26Pvt. Ltd., the Bangalore ITAT has held that customer

relationship rights are in the nature of goodwill and has

accordingly allowed depreciation on the same.

FACTS

M/s. Incap Manufacturing Services Pvt. Ltd.

(“Assessee”) is a subsidiary of Incap Oyj Finland

(“Incap Finland”) and is engaged in the business of

manufacturing electrical equipment, sub-systems,

inverter, power products and power electronic

products, etc. For AY 2009-10 the Assessee led its

return of income declaring a loss of INR 119.7 Million.

However, after completion of

assessment proceedings by the

AO, the losses were reduced to INR

107 Million as the AO disallowed the

depreciat ion c la imed by the

Assessee amounting to INR 12.6

Million on customary relationship

rights. The said depreciation claim was rejected by the

AO on account of the fact that depreciation on goodwill

is not allowed.

The CIT(A) upheld the order of the AO and the

Assessee led appeal before ITAT. The ITAT

remanded the matter back to the AO to decide in the

light of SC’s judgement in the case of Smifs 2 7

Securit ies . The Assessee fur ther led a

miscellaneous petition against the order of ITAT, which

was allowed by the ITAT, but the question on

depreciation was remanded back to the AO.

The AO acknowledged that the Assessee had

considered customer relationship rights as intangibles

on which depreciation was claimed. Therefore, the

matter before the AO was on two issues; rst, whether

depreciation can be claimed on intangible assets and,

second, whether customer relationship rights

constituted intangible assets. On the rst part of

whether depreciation can be claimed on intangible

assets, the Assessee relied on the SC decision of 28Smifs Securities, to contend the same. On the

second issue of whether customer relationship rights

can constitute intangible assets, the AO relied on the

Bangalore ITAT judgement in the case of M/s. Sanyo 29

BPL, which held that the customer distribution

networks do not result in intangible asset. Further, the

AO also opined that the ITAT has already rejected the

claim of the Assessee that customer relationship

rights constituted intangible assets, vide order of the

ITAT on the miscellaneous petition. Given the same,

the AO rejected the depreciation claim of the

Assessee on account of the fact that

customer relationship rights do not

constitute intangible assets.

Against the order of the AO, the

Assessee led an appeal before the

CIT(A), which was dismissed by the

CIT(A) again and thus, the matter landed up before the

ITAT.

ISSUES

• Whether the customer relationship rights are in

the nature of intangible assets?

• Whether depreciation can be claimed by the

Assessee on intangible assets?

ARGUMENTS

The Assessee argued that customer relationship

rights gained by the Assessee were a part of the

Business Transfer Agreement (“BTA”) executed as

slump sale for which the Assessee had paid a lump

sum consideration. However, in its books of accounts

it had valued xed and intangible assets separately.

26 M/s Incap Manufacturing Service Pvt. Ltd. v. Deputy Commisioner of Income-tax; ITA Nos. 2214 to 2216/ Bang/ 2018. 27 CIT v. Smifs Securities Ltd., 348 ITR 3022.28 Supra.29 M/s. Sanyo BPL Pvt. Ltd. v. Deputy Commissioner of Income-tax (75 taxmann.com 253) (Bangalore Trib.).

”“Depreciation on customer

relationship rights allowed byBangalore ITAT.

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Under the head of intangible assets also, the

Assessee had valued customer relationship rights and

goodwill separately. According to the Assessee, the

amount of customer relationship rights was to be

treated as non-compete fees were also paid to the

seller against an undertaking for non-participation in

any jurisdiction as an owner, partner or shareholder or

in any capacity in business of contract manufacturing

services. Further, the Assessee also contended that

the AO has not considered the directions of the ITAT.

The IRA argued that there was no specic direction

from the ITAT and, therefore, AO was correct in grant

of depreciation on the component of goodwill only and

not on the component of customer relationship rights.

DECISION

The ITAT allowed the appeal of the Assessee for the

claim of depreciation on customer relationship rights.

Not only did ITAT found force in the claim of the

Assessee but the ITAT found that on previous appeal

of the Assessee, the co-ordinate bench had made an

observation that the AO, before disallowing the claim

of depreciation, had himself taken a view that the

customer relationship rights are in the nature of

goodwill. Thus, the fact that customer relationship

rights are goodwill remains undisputed.

Further, the position that goodwill is an asset and is

eligible for depreciation has already been settled by 30

the SC in case of Smifs Securities .

Therefore, the claim of the Assessee was allowed by

ITAT.

SIGNIFICANT TAKEAWAYS

The decision of ITAT in this case is fairly on a settled

position of law. Delhi HC in the case of Triune Energy 31Services, has settled the position that excess

consideration paid over assets taken over constituted

goodwill. Further as per Smifs Securities the

depreciation over intangible assets (which includes

goodwill) is allowed. Therefore, for the AO to deny the

Assessee’s depreciation claim twice may not have

been justied in the light of the aforesaid decisions.

However, IRA ofcers taking a very theoretical

approach and trying to somehow make an adjustment

to the taxable income of taxpayers has not been

reduced in a signicant manner and such approach by

the IRA gives rise to unnecessary and unwanted

litigation on various levels of tax authorities. This kind

of litigation is a wastage of time and resources for the

assessee as well as tax authorities and hence, the

CBDT should take strict action against ofcers of the

IRA who keep violating settled principles of law.

30 Supra.31 Triune Energy Services (P) Ltd. v. Deputy Commissioner of Income Tax & Others; ITA Nos. 40 and 189/ 2015.

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MUMBAI ITAT DELETES NOTIONAL RENTAL ADDITION

ON UNSOLD INVENTORY HELD AS STOCK-IN-TRADE

38

The Mumbai ITAT in the case of Kanakia Spaces Pvt. 32Ltd., has held that for AYs prior to AY 2019-20, unsold

inventory held by builders and developers should be

considered as stock-in-trade and should not be

subject to notional rent under Section 23 of the IT Act

in the hands of the builder or developer.

FACTS

Kanakia Spaces Pvt. Ltd. (“Assessee”) was engaged

in the business of construction of housing projects. In

AY 2013-14 and AY 2014-15, the Assessee in its return

of income, showing certain unsold ats in various

projects as stock-in-trade. The AO

sought to tax the annual letting

value (“ALV”) of the unsold ats as

income from house property of the

Assessee. The AO proceeded to

tax the ALV of the unsold houses in

the hands of the Assessee. The

Assessee appealed before the

CIT(A) without success and hence,

an appeal was preferred before the ITAT.

ISSUES

Whether the ALV of unsold housing units may be taxed

in the hands of the builder as income from house

property for AYs prior to AY 2019-20?

ARGUMENTS

The Assessee claimed that it did not intend to hold the

unsold ats as investment and earn rental income

therefrom, but only as stock-in-trade. Such stock-in-

trade constitutes a business asset of the Assessee

and no notional ALV could be assessed as income

from house property in the hands of the Assessee.

While the AO had placed reliance on the decision of

the Delhi High Court in Ansal Housing Finance and

33Leasing Company Ltd., which had treated ALV of

nished housing units held by the developer as

income from house property, the Assessee relied on a

contrary judgment of the Gujarat High Court in Neha 34 Builders Pvt. Ltd. The IRA simply relied on the

holding in Ansal to support its contention that the ALV

must be taxed as income from house property.

DECISION

The ITAT took note of Section 23(5) of the IT Act which

was inserted by way of the Finance Act, 2017, with

effect from April 1, 2018, i.e., AY 2019-20, and

subsequently amended in 2019.

This section deems the ALV of

unsold housing property in the

hands of the developer or builder

as nil for two years after the

completion of the project. However,

since the assessments in the case

of the Assessee pertained to AY

2013-14 and AY 2014-15, section

23(5) was not applicable.

The ITAT acknowledged that the two differing High

Court judgments relied by the Assessee and the IRA

were not decisions of its jurisdictional High Court, i.e.,

the Bombay High Court. While the Delhi High Court in

Ansal had concluded that ALV from unsold houses

should be taxed as income from house property, since

the only issue of consideration for assessment under

the head of income from house property is ownership

of the property by the assessee while the Gujarat High

Court in Neha Builders had considered that in case

the property was held as stock-in-trade, then such

property would partake the character of the stock,

income from which would be business income and not

income from house property. The ITAT upon careful

consideration of the precedential value of the two

conicting High Court judgments, deferred to the law

“”

If two reasonable constructions of a taxing provision are possible,

that construction which favorsthe tax payer must be

adopted.

32 Kanakia Spaces Pvt. Ltd. v. DCIT, ITA No. 7288/Mum/2017, decided on April 23, 2019.33 CIT v. Ansal Housing and Finance and Leasing Company Ltd., (2013) 354 ITR 180 (Del HC).34 CIT v. Neha Builders Pvt. Ltd., (2008) 296 ITR 661 (Gujarat).

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espoused by the Supreme Court in Vegetable 35Products. The Apex Court had ruled that when faced

with two different interpretations of a taxing statute,

the interpretation which favors the assessee must be

adopted. Accordingly, the ITAT concluded that absent

a decision of the jurisdictional High Court on the issue,

the interpretation favourable to the Assessee must be

accorded, and proceeded to remove the addition

made by the AO.

SIGNIFICANT TAKEAWAY

An important principle on the binding nature of

contradictory precedents in tax litigation, as endorsed

by the Apex Court in earlier instances, emerges from

this order of the ITAT – that if it is possible to develop

two contrary constructions of a specic provision of a

tax statute, the one in favour of the taxpayer must

necessarily be preferred over the other. This would be

the case only in the absence of a direct binding

decision of a higher Court or the appropriate

jurisdictional Court on the issue in question.

35 CIT v. Vegetable Products, (1973) 88 ITR 192 (SC).

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SC VACATES STAY GRANTED BY DELHI HC ON

NOTIFICATION ENABLING RETROSPECTIVE EXERCISE

40

OF POWERS UNDER BLACK MONEY ACT

36The SC in the case of Gautam Khaitan, has vacated

stay granted by the Delhi HC wherein it was held that

the Central Government cannot exercise powers

under an Act before it has been made effective.

FACTS

The Assessee had led writ petition before the Delhi

HC under Articles 226 and 227 of the Constitution of

India, challenging the constitutional validity of

Sections 10 (1) and 54 of the Black Money

(Undisclosed Foreign Income and Assets) and

Imposition of Tax Act, 2015 (“Black Money Act”). The

Central Government had promulgated an order under

Section 84 of the Black Money Act (“Order”) which

claried that the Black Money Act shall come into force

on July 1, 2015 from the original date of April 1, 2016

i.e. AY 2016-17. The petitioner was alleged to have

wilfully evaded tax and prosecution proceedings

under Section 51 of the Black Money Act was initiated.

The IRA had issued order sanctioning prosecution,

which is required mandatorily under Section 55 of the

Black Money Act before commencing prosecution

proceedings. The petitioner had also sought stay on

operation of this Order and to restrain the assessment

ofcer from taking any action against the petitioner.

ISSUES

Whether the Government can exercise powers under

the Black Money Act prior to the statute coming into

force?

ARGUMENTS

Before the Delhi HC, the petitioner argued that Section

1(3) of the Black Money Act explicitly stipulates that

the said Act shall come into force on April 1, 2016 and

therefore, the CBDT cannot issue notications for the

purposes of advancing the applicability of the said

provisions to advance the said date from April 01,

2016 to April 01, 2015.

On the other hand, the IRA argued that under Section

86 of the Black Money Act empowers the CBDT to

remove difculties so as in order to give effect to the

provisions of the said Act and hence, the notications

issued to prepone the applicability of the said Act are

valid.

DECISION

The Delhi HC held that that the Government could not

have exercised its powers under the Black Money Act

before it came into force and as the legislature in its

wisdom decided April 1, 2016 as the date of entry of

force of the said statute.

The HC had acceded to the arguments of the

Assessee and had held that the Government ought

not to have given effect to a statute prior to the date it is

expressly stipulated to come into force by Parliament

in the said enactment. The HC also observed that, in

the instant case, the CBDT has invoked the provisions

of the Act before even the said Act was given effect to.

Therefore, the prosecution initiated against the

Assessee under the Black Money Act would result in

grave prejudice and accordingly, the HC ordered the

assessing ofcer to restrain from taking or continuing

any action against the petitioner.

The SC in the SLP summarily vacated the interim relief

granted by the Delhi HC and held that the IRA is free to

prosecute the Assessee in accordance with the

provisions of the Black Money Act, subject to the nal

decision about the constitutional validity of

notications.

36 Gautam Khaitan v Union of India, (2029) 308 CTR (Del) 676.

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SIGNIFICANT TAKEAWAYS

The decision is silent as to why the stay granted by the

Delhi HC was vacated but merely stated that the IRA is

free to prosecute the Assessee, without even

discussing the merits of the case.

It may be noted that Section 86 of the said Act merely

empowers the IRA to remove the difculties in giving

effect to the provisions of the said Act. However, in the

instant case, the IRA seemed to have applied the Act

before it became effective, which could be contended

as expanding the scope of the Act and hence,

impermissible. Surprisingly, the SC decision does not

discuss any of these aspects and hence, the order

seems to have complicated the matter instead of

resolving it.

It is also worthwhile to highlight that Section 85(3) of

the said Act explicitly provides that the IRA is

empowered to give retrospective effect to the rules

forming part of the Act, from a date not earlier than the

date of commencement of the Act itself and also that

no retrospective effect shall be given to any such rules

which prejudicially affect the interest of the tax payers.

Although the said provision deals only with providing

retrospective effect to the rules and not to the

provisions of the Act itself, the legislative intent is

clearly made available in the said provision i.e. the IRA

cannot even make a rule, retrospectively applicable, if

the same is prejudicial to the interest of the tax payers.

In view of the above discussions, it may be

summarised that the HC had correctly stayed the

prosecution proceedings and it is not clear as to why

the SC has allowed the IRA to continue with the

prosecution proceedings. As the order passed by the

SC is not a speaking order, it is also not possible to

understand the rationale behind it. The instant order of

the SC is not only prejudicial to the Assessee, it may

create signicant hurdles for other tax payers who

may be charged with similar violations and it could

also create enormous administrative burden on the

IRA if the dispute were to be ultimately decided in

favour of the tax payers.

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CASE LAW UPDATES

- INDIRECT TAX

- AAR RULINGS

42

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ITC CAN BE CLAIMED WHEN CONSIDERATION IS PAID

THROUGH BOOK ADJUSTMENT

43

37In the case of M/s Senco Gold Limited, the AAR,

West Bengal held that the GST legislations and rules

do not restrict a recipient from claiming ITC when

consideration is paid through book adjustment.

FACTS

M/s Senco Gold Limited (“Applicant”) was engaged in

the manufacturing and retailing jewellery and other

articles under the brand name, “Senco Gold &

Diamonds”. The Applicant also entered into franchise

agreements with franchisee(s) for operation of

showrooms. The Applicant raised tax invoices on the

franchisee(s) for supply of jewellery as well as for

franchise support services. The

franchisee in turn raised tax invoices on

the Applicant for supply of old gold,

silver etc., received from customers.

The Applicant intended to settle the

mutual debts through book adjustments

and approached the AAR to seek a ruling on whether

ITC was admissible in the said scenario.

ISSUE

Whether book adjustment constitutes a valid form of

consideration, as dened under Section 2(31) of the

CGST Act?

ARGUMENTS

The Applicant argued that Section 16(2) of the CGST

Act provided that the amount of ITC availed by a

recipient would be added to his output tax liability if he

failed to pay the supplier, the value of supply, within a

period of 180 days from the date of issuance of

invoice. The Applicant made reference to the West

Bengal VAT Act, 2005 wherein the claim of ITC was

restricted to such transactions where payment was

made by cheques/draft/electronic banking, only.

Further, the Applicant submitted that no such

restrictive provision existed under the CGST Act. The

Applicant also put forth the contention that payment

through adjustment of book debts was a prevalent

commercial practice, which was also recognized

under the prescribed Accounting Standards.

On the other hand, the Revenue contended that

Section 16 of the CGST Act provided for the

availability of ITC only when the conditions and

restrictions under Section 49 of the CGST Act were

fullled. Section 49 provided that every deposit

towards tax liability should be through internet

banking, NEFT/RTGS, credit

or debit cards or by any other

prescribed mode. Therefore,

the Revenue took a view that

all transactions between the

supplier and recipient had to be made through online

banking system, for the recipient to be eligible to claim

ITC.

DECISION

The AAR observed that Section 49 of the CGST Act

encompassed within its ambit the payments made by

a supplier, towards his tax liability, to the Government

and not transactions between the supplier and

recipient. The AAR also opined that Section 49 of the

CGST Act did not prohibit the Applicant from reporting

ITC in returns, when consideration was paid by book

adjustment, or in any other manner.

The AAR gave a broad interpretation to the word,

“consideration”, as dened under the CGST Act, and

held that such denition included almost every form of

payment. The AAR observed that a payment was a

”“This definition of “consideration”

includes any form ofpayment.

37 In re: M/s Senco Gold Limited, 02/WBAAR/2019-20.

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transfer of an asset to the payee for discharge of an

obligation arising out of transactions involving goods,

services or other legal obligations. The most common

class of asset used for payments was money.

However, other assets unless specically excluded by

law could be used, provided that the payee accepted

payment by such assets, other than money, as good

and sufcient discharge of the obligation. Therefore, a

reduction in the book debt (an asset in the payer’s

books of account) was a valid form of payment.

Accordingly, the AAR ruled that the Applicant could

pay the consideration for inward supplies by way of

setting off book debts, given that the GST legislations

did not restrict the recipient from claiming ITC where

consideration was paid through book adjustments.

SIGNIFICANT TAKEAWAY

The ruling will provide aid to taxpayers, specically

sectors in which businesses have multiple branch

ofces, project ofcers, franchisees, etc., by reducing

the burden of carrying out the processes associated

with exchange of money, as consideration in relation

to intercompany transactions. It is in line with the spirit

of GST of offering reduced compliances and simplied

methods of carrying out business.

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CASE LAW UPDATES

- INDIRECT TAX

- OTHER JUDICIAL PRONOUNCEMENTS

45

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SALE OF GOODS BY A DUTY FREE SHOP NOT

EXIGIBLE TO GST

46

38In Atin Krishna, the Division Bench of the Allahabad

HC held that supply of goods to passenger incoming to

India or going outside India, from a retail outlet

operating in the arrival or departure terminals of an

international airport, i.e. duty free shop(s) ("DFS") was

exempt from GST.

FACTS

Atin Krishna (“Petitioner”) led a Public Interest

Litigation (“PIL”) before Allahabad HC contending that

revenue loss was taking place as DFS at Chaudhary

Charan Singh International Airport, Lucknow

("Airport") were neither discharging IGST on the

goods imported into the territory of

India nor CGST and SGST on the

sale of goods to passengers prior to

January 31, 2019. Moreover, it

contended that DFS were incorrectly

permi t ted to c la im re fund o f

accumulated ITC of GST paid on

procurement of domestic goods and services.

ISSUES

• Whether GST was payable on supply of goods

by a DFS?

• Whether a DFS can c la im re fund o f

accumulated ITC of GST paid on procurement

of domestic goods and services?

ARGUMENTS

The Petitioner argued that the goods would be

construed to be imported into India when they cross

the territorial waters of India. Thus, such goods would

be exigible to IGST under Section 5 of the IGST Act.

Additionally, supply of goods by a DFS to passenger

would be an intrastate supply in terms of Section 8(1)

of the IGST Act as the location of supplier and the

place of supply were in the same state. The Petitioner

argued that the essential ingredients to qualify as an

export of goods as derived from judicial precedents is

that goods must have a specic destination, a

condition not satised by a DFS. Thus, the Petitioner

contended that sales to passenger at the departure

terminal were exigible to CGST and Uttar Pradesh

GST (“UPGST”).

The Respondent contended that supply of goods

imported into the territory of India till they cross the

custom frontier shall not be treated as supplies of

goods in the course of interstate trade or commerce.

Customs frontiers of India was

dened to mean as the limits of a

customs area as dened under

Customs Act. Further customs area

means the area of a customs station

or a warehouse and includes any

area in which imported goods or

goods for export were ordinarily kept before clearance

by the Customs Authorities. The DFS were located in

the area of customs station (customs airport) or

warehouse. Accordingly, the supply of goods imported

to and from DFS did not cross the custom frontier of

India. Thus, it would not be exigible to CGST and

UPGST.

Additionally, IGST on import of goods was levied at the

time of levy of customs duty. The taxable event for levy

of customs duty on imported goods occurred when the

bill of entry for home consumption of goods was led.

As DFS was supplying goods to the passenger before

its clearance for home consumption the DFS was

neither liable for customs duty nor IGST.

Similarly, where goods were not cleared for home

consumption, they could be cleared for exports

without payment of customs duty after ling of

shipping bill for export. In this regard, where the

”“ Duty free shops are

eligible to claim refund of unutilised ITC.

38 Atin Krishna v. U.O.I. Thru Secy. Ministry of Finance and Ors., TS-372-HC-2019(ALL)-NT.

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passenger going to another country purchased goods

from DFS, an invoice was issued by DFS. Such

invoice was deemed to be a shipping bill for purpose of

exports. Therefore, the Respondent contended that

such supplies would be zero- rated supply and refund

of unutilized ITC could be claimed.

DECISION

HC relied on SC rulings and observed that in case of

DFS, goods were imported from outside India and

were kept in customs warehouse and exported

therefrom. Thus, the stage for payment of customs

duty did not arise. HC also elucidated that such goods

were cleared for home consumption by the

passengers, when they crossed the customs frontier

at the airport along with such goods as bona-de

baggage without payment of customs duty. Thus, it

concluded that DFS was not liable to pay customs duty

including IGST for supply of goods at arrival terminal.

Further, the HC held that the supply of goods by the

DFS to passengers departing from India to a foreign

destination at the departure terminal were never

cleared for home consumption. The passenger acted

as a carrier of goods out of India and received invoices

which were deemed shipping bills. Exports were zero-

rated supply under GST legislations. Hence, the HC

concluded that the DFS were eligible to claim the

refund of unutilized ITC.

SIGNIFICANT TAKEAWAYS

Last year, an order of the AAR eliminated the incentive

for DFS to operate at airports where they end up

paying heavy rentals as it held that the supplies by a 39

DFS were exigible to GST. The aforementioned

judgement resettles the position that DFS were free

from levy of tax which was disturbed by it. The said

judgement also extensively discusses the principles of

import and export of goods from customs frontier of

India.

Moreover, the favourable interpretation provided by

the judgement that the goods supplied by DFS would

not be exigible to IGST. This would deter the

department from raising a show cause notice against

the DFS for non-payment of GST on supplies made by

it to passengers. Moreover, various products for

exports do not require to comply with particular

standards. Many DFS are engaged in supplying such

products. Accordingly, the said ruling also prevents

various government authority from challenging

violation of laws which are applicable in relation to

supply of goods within India. The said position has

also been upheld by the Bombay HC in the judgment 40

of Sandeep Patil . The said judgment claried that

the goods sold at DFS at departure terminal were

export. Accordingly, the requirement of mandatory

labelling of health warnings on tobacco products

under Cigarettes and Other Tobacco Products

(Prohibition of Advertisement and Regulation of Trade

and Commerce, Production, Supply and Distribution)

Act, 2003 would not be applicable. Accordingly, sale of

products from DFS would not be disturbed.

39 In re M/s Rod Retail Pvt. Ltd. 2018-TIOL-08-AAR-GST.40 Sandeep Patil. v. Union Of India & Another, 2019 (2) TMI 1628.

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WRIT IS MAINTAINABLE FOR PRE-ARREST BAIL IN

CASE OF OFFENCES UNDER GST LEGISLATIONS

48

41In P.V. Ramana Reddy, the Division Bench of the

Telangana HC held that a taxpayer cannot be granted

a r e l i e f a g a i n s t a r r e s t e v e n w h e r e t h e

assessment/adjudication has not been completed.

FACTS

Taxpayers in the State of Telangana (“Petitioner(s)”)

were summoned by the department (“Respondent”)

due to inter alia issuance of fake invoices, circular

trading, invoicing without supply of goods/services,

fake e-way bills, and availment of fraudulent ITC. The

Petitioners, in apprehension of arrest by the proper

ofcer, led writ petitions before the Telangana HC to

obtain a relief against such arrest.

ISSUES

• Whether the Petitioners can be arrested prior to

assessment or launch of prosecution?

• Whether a petition akin to anticipatory bail can

be led as a writ petition?

ARGUMENTS

In relation to the maintainability of

the petit ion, the Petit ioners

contended that there was no rst

information report led against

them before their arrest under

Section 69(1) of CGST Act.

Therefore, they could not le for anticipatory bail.

Filing a writ petition was the only alternative available

to them.

In relation to arrest, the Petitioners argued that a

person could not be arrested in terms of Section 41

and 41A of the Code of Criminal Procedure, 1973

(“CrPC”) till the person complied and continued to

comply with notices of appearance before the

summoning authority. Moreover, in terms of Section

41A(3) of the CrPC, in case where a person had been

compliant with not ices of appearance, the

discretionary power to arrest could only be exercised

for reasons to be recorded. The Petitioners stated that

as the maximum punishment prescribed under

Section 132 of the CGST Act was imprisonment for

ve years and they were compliant with notices of

appearance, there was no necessity for their arrest

under Section 69(1) of the CGST Act.

The Petitioners also contended that the CGST Act

provided for the procedure of assessment even in

cases where there was discrepancy in information

furnished in return. The Respondent had an option to

scrutinize book of accounts and other documents

during assessment. Accordingly, an offence under the

CGST Act would materialize post assessment or

special audit. Thus, there was no necessity to arrest

till an adjudication occurred in terms of the CGST Act.

The Petitioners argued that power to arrest under

Section 69(1) of the CGST Act was available only in

cases where the Respondent had reason to believe

that a person had committed a cognizable and non-

bailable offence. An ofcer under the CGST Act, not

being a police ofcer, could not seek custody of an

arrested person for completing the

investigation. Such an arrest would

amount to punishing a person

without trial. The Petitioners also

stated that offences under the

CGST Act were compoundable,

thus arrest was not required.

On the other hand, the Respondent contended that a

writ petition was not maintainable, as the petitions

were in the nature of an application for anticipatory

bail led in the form of a writ petition, in the absence of

criminal proceedings.

Sections 41 and 41A of the CrPC were applicable only

post arrest in terms of Section 69(3) of the CGST Act,

and in criminal proceedings. In the instant case, no

”“GST officer may arrest withoutconducting an assessment.

41 P.V. Ramana Reddy and Ors. v. U.O.I., Ministry of Finance and Ors. 2019 (4) TMI 1320.

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arrests were made and the prosecution was not

launched (i.e. not criminal proceeding). The

provisions of CrPC were not applicable in the instant

case. Thus, the HC could not interfere in such

proceedings.

The Respondent also contended that the Petitioners

were guilty of circular trading as they claimed ITC

without procuring inputs, and passed on the same to

companies without selling any goods. Such an act was

a cognizable and non-bailable offence and the

Respondent had power to arrest such person under

Section 69(1) of the CGST Act.

DECISION

The HC observed that there was an incongruity

between Section 69(1) and Section 132(4) and (5) of

the CGST Act. Section 69(1) of the CGST Act provided

for the power of the commissioner to order arrest of

person only in cognizable and non-bailable offences.

However, Section 69(3) discussed about the

applicability of CrPC in case of arrest in non-

cognizable and bailable offences. The HC highlighted

that it was unclear as to how a person who had

committed a non-cognizable and bailable offence

could be arrested under the GST legislations.

In relation to the applicability of CrPC, the HC

disagreed with the Respondent’s contention that the

Petitioners could not rely on Section 41 and Section

41A of the CrPC. It was of the view that Section 70(1)

of the CGST Act was the parallel provision for Section

41A of CrPC, as they both deal with summoning of

person for enquiry.

In relation to maintainability of the writ, the HC relied

on SC rulings and observed that in case of exceptional

circumstances, the HC was empowered to issue the

writ of mandamus to direct an ofcer not to effect 42

arrest. However, it held that writ must not restrict the

proper ofcer from performing his statutory function.

Although the HC held the writ petition to be

maintainable, it did not grant relief to the Petitioners

against arrest. The HC observed that GST was in a

nascent stage. The taxpayers had exploited the law by

projecting huge turnover which remained on paper

and availed ITC to the tune of INR 250 crores. Thus,

there was nothing wrong in the Respondent

apprehending the person involved in fraudulent claim

of ITC should be arrested. Moreover, the list of

offences included under Section 132(1) of CGST Act

have no co-relation to an assessment. Thus, the

argument that prosecution can only be launched post

completion of assessment was not valid.

The HC also recorded that Section 69(1) of CGST Act

used the phrase “reasons to believe” whereas Section

41A(3) of CrPc used phrase “reasons to be recorded”.

Therefore, there was no requirement to record

reasons to believe in the order to authorize arrest.

SIGNIFICANT TAKEAWAYS

Under the erstwhile service tax regime, it was a settled

position of law that a person could be arrested only

post an enquiry was conducted, and an opportunity

was granted to such person, sought to be arrested, to

defend his/her/their stand.

However, the aforementioned judgement is contrary

to the said position in context of GST legislations. 43

Relying on its own ruling in P.V. Ramana Reddy the 44

Telangana HC in Ferrous Enterprises Pvt. Ltd.,

held that when arrest was not prohibited prior to

assessment, any coercive action which was less

grave than arrest, would also not be prohibited.

Although, the aforementioned Telangana HC

judgement of P.V. Ramana Reddy was challenged by

way of a special leave petition before the SC, the same

was dismissed. Similar stand has also been taken by 45 various HC of other States.

46 47 However, certain HCs , and the SC in Meghraj,

granted pre-arrest bail in the matters of wrongfully

availing ITC. Thus, another special leave petition was

led before the SC. The said special leave petition has

been referred to a three judge’s bench and is pending 48for hearing. It would be worthwhile to wait and watch,

whether the SC settles the position for the GST regime

in a manner similar to the erstwhile service tax regime.

42 Km. Hema Mishra v. State of U.P., 2014 (4) SCC 453; Kartar Singh v. State of Punjab, 1994 (3) SCC 569.43 Makemytrip India Pvt. Ltd. v. Union of India (2016) 44 STR 481 afrmed by the SC in Union of India v. Makemytrip India pvt. Ltd. (2019-SCConline SC 560).44 Ferrous Enterprises Pvt. Ltd. v. Union of India, TS-417-HC-2019(Tel).45 Mahendra Kumar Singhi v. Commissioner of State Tax, 2019 (5) TMI 310 (Mad HC); Meghraj Moolchand Burad v. Directorate General of GST (Intelligence) , Pune, 2019 (2)

TMI 1150 (Bom HC).46 Sapna Jain and Ors v. Union of India, 2019 (5) TMI 1610; M/s. Jayachandran Alloys (P) Ltd. v. The Superintendent of GST And Central Excise, 2019 (5) TMI 895 (Mad HC).47 Meghraj Moolchand Burad v. Directorate General of GST (Intelligence), Pune, 2019 (1) TMI 1563 (SC).48 Sapna Jain and Ors v. Union of India, [TS-381-SC-2019-NT].

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TRANSFER OF LAND DEVELOPMENT RIGHTS NOT A

TAXABLE SERVICE

50

In the case of DLF Commercial Projects 49

Corporations, the Chandigarh Bench of the

CESTAT held that where the assessee developer had

entered into a land development agreement which

was only in the nature of acquisition of land, it would

not constitute a taxable service under the FA.

FACTS

DLF Commercial Projects Corporations (“Appellant”)

was engaged in the business of construction and

development of integrated township as well as certain

other services. It entered into a Land Development

Agreement (“Agreement”) with DLF Ltd. In terms of

the Agreement, the Appellant were required to transfer

the development rights (“TDR”) which it had acquired

from Land Owning Companies (“LOC”), to DLF Ltd. In

lieu of this TDR, DLF Ltd. would have transferred a

fund to the Appellant, and the Appellant in turn, was to

transfer such to the LOCs, in the form of a refundable

deposit, towards the purchase of

such rights. However, in reality, the

Appellant had neither purchased

nor transferred the land or the TDR

to DLF Ltd. DLF Ltd. gave advances

from time to time to the Appellant for

purchase of land. Such advances

were received as ‘refundable performance deposit’ by

the Appellant, which were subsequently transferred to

the LOC to enable them to purchase the land. Such

refundable performance deposit was to be refunded to

DLF Ltd. in future, as and when sale deeds for sale of

land/transfer of TDR were executed between the

LOC, DLF Ltd. and prospective buyers.

In light of the clauses of the Agreement, a show-cause

notice was issued to the Appellant seeking to levy

service tax on the refundable performance deposit,

considering the same to be a consideration for transfer

of TDR to DLF Ltd.

On adjudication, the assessing authority conrmed

the said levy. The Appellant, thereafter, led this

appeal against the adjudication order before the

CESTAT.

ISSUES

• Whether the Agreement was an agreement for

transfer of TDR?

• If yes, whether service tax was payable on the

said Agreement?

ARGUMENTS

The Appellant argued that there was no actual transfer

of TDR under the Agreement as it was merely futuristic

in nature. Since, service tax was levied on the actual

provision of services only, no service tax could be

levied on a future supply.

The Appellant further argued that

the “Refundable Performance

Deposit” remitted to them was not in

the nature of a consideration

towards transfer of TDR by it, since

no part of the amount was retained

by the Appellant. The Appellant also

produced a Chartered Accountant’s certicate in

support of its contention that it neither purchased land

nor any TDR from the LOCs.

The Appellant further argued that TDR was a benet

arising out of land and therefore would be treated as

an “immovable property”. As such, even if there was a

transfer of TDR, such a transaction would be a transfer

of an immoveable property, and excluded from the

meaning of ‘service’, as dened under Section 65B

(44) of the FA. Hence, no service tax could be levied

on the same.

”“TDR when transferred with

land is in the nature of animmoveable property.

49 DLF Commercial Projects Corporations vs. Commissioner of Service-Tax, Gurugram [2019] 105 taxmann.com 344 (Chandigarh – CESTAT).

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The Appellant also contended that DLF Ltd. had made

several enquiries with the authorities to ascertain

whether transfer of TDR was exigible to service tax.

The Appellant also submitted that the demand, for the

substantial period in dispute, was barred by limitation.

On the other hand, the Revenue Authorities

(“Respondent”) argued that the Appellant had indeed

transferred TDR to DLF Ltd. under the Agreement.

The transaction between the LOCs and the Appellant

was mutually exclusive of the transaction between

DLF Ltd. and the Appellant under the Agreement. The

former transaction was not under scrutiny in the

present case. The funds provided by DLF Ltd. were in

the nature of a business advance paid to the Appellant

for the procurement of TDR.

The Respondent further contended that the balance

sheet of the Appellant reected such advance

amounts received towards TDR as ‘inventory’, which

clearly indicated that there was a transfer of TDR from

the Appellant to DLF Ltd. Thus, such transfer was not

futuristic in nature. Therefore, the Respondent argued

that the Appellant was liable to pay service tax on such

advances received from DLF Ltd. in terms of Rule 3 of

Point of Taxation Rules, 2011, which provided for the

time of receipt of any advance as the point of taxation.

DECISION

The CESTAT noted that the Agreement did not

encourage the actual transfer of TDR by the Appellant.

The Agreement was futuristic in nature as the transfer

of TDR could be effected only after the acquisition of

the concerned land. As throughout the transaction, the

Appellant would never be the owner of the land, it

would have no right to transfer any TDR.

The CESTAT observed that in order to render a

transaction liable for service tax, the nexus between

the consideration agreed and the service activity to be 50

undertaken should be direct and clear and the money

received should be directly attributed to an identied 51activity. However, this was not the case in the instant

matter. Therefore, the CESTAT held that the funds

provided by DLF Ltd. could not be considered as

consideration for service provided.

The CESTAT further observed that in terms of Section

3(26) of General Clauses Act, 1897, TDR being in the

nature of a benet arising out of land, would be treated

as an “immoveable property” in the instant case.

Therefore, transfer of the same was outside the

purview of “service” under Section 65B (44) of the

Finance Act.

The CESTAT also noted that since the Respondent

had not responded to the letters of DLF Ltd., seeking

clarity on the levy of service tax on transfer of TDR, it

can be inferred that the Respondent was not clear on

whether such a transaction was a taxable service or

not. Thus, there was no mala de on part of the

Appellant. Accordingly, the CESTAT held that the

demand of service tax conrmed by the assessing

authority was unsustainable and the same was set

aside.

SIGNIFICANT TAKEAWAYS

The levy of service tax on TDR has always been a

disputed issue under the erstwhile service tax regime.

The aforesaid ruling of the Chandigarh CESTAT is the

rst decision of its kind wherein the CESTAT claried

that in the instant case, TDR would be treated as an

immoveable property and hence, its transfer would not

a taxable service under the FA. However, it must be

noted that the Hon’ble CESTAT has restricted its

analysis of taxability of TDR to the factual matrix of the

instant case, and has not examined the nature of TDR

in general. Hence, the issue of levy of tax on TDR still

remains a grey area.

It may also be noted that under the GST legislations,

TDR has been explicitly treated as a supply, exigible to

GST at the rates prescribed in this regard. However, a

writ petition has already been led before the Bombay

HC challenging the constitutional validity of levy of 52

GST on TDR.

51

50 Mormugao Port Trust v. CC, CE&ST, Goa - 2017 (48) S.T.R. 69 (Tri. - Mumbai).51 Cricket Club of India v. Commissioner of Service Tax, 2015 (40) S.T.R. 973.52 Nirman Estate Developers Pvt. Ltd. v. Union of India W.P. 3357 of 2018 Bombay HC.

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ITC AVAILABLE ON CONSTRUCTION OF IMMOVABLE

PROPERTIES FOR LETTING OUT

52

53In the case of M/s Safari Retreats Pvt Ltd and Anr.,

the Orissa HC held that ITC would be available on

GST paid on procurement of goods and/or services

utilized for construction of a mall, which includes GST

payable on the rental income.

FACTS

M/s Safari Retreats Pvt. Ltd. and Anr. (“Petitioners”)

were engaged in the business of construction of

shopping malls and letting them out on rental basis.

They procured various inputs and input services for

the purposes of construction, and

paid GST on the same. The

Petitioners were desirous of setting

off the ITC of the same against their

output GST liability on renting of

immovable property. However, in

view of the restriction on availability

of ITC under Section 17(5)(d) of the 54

CGST Act , the GST authorities (“Respondent”)

advised the Petitioners to deposit the GST amount

without utilizing the ITC. Therefore, the Petitioner

challenged the denial of the benet of ITC under

Section 17(5)(d) of the CGST Act.

ISSUES

Whether ITC can be claimed on goods and/or services

utilized/consumed in the construction of malls for the

purpose of letting it out?

ARGUMENTS

The Petitioners argued that the provisions of Section

17(5)(d) of the CGST Act would not be applicable to

this case. They were entitled to avail benet of ITC of

GST paid on procurement of goods and/or services as

GST was payable by them on the rentals income

received from letting out of the mall. It was also

submitted that as there would be no break in the

supply chain of the Petitioners, ITC were to be made

available to the Petitioners.

The Petitioner contended that Section 17(5)(d) of the

CGST Act was not made applicable to builders who

sold units in buildings before the issuance of a

completion certicate, considering that GST was

payable on the output supply. However, ITC was

denied under Section 17(5)(d) of the CGST Act to

builders who were letting out their buildings for renting,

even though GST was payable on the letting out.

The Petitioner argued that Section

17(5)(d) of the CGST Act classied

the aforesaid taxable persons under

two different categories, even though

both were carrying continuous

business without any break in supply

chain. Such classication was not a

reasonable classication and was

egregiously arbitrary and discriminatory, and hence,

was violative of Article 14.

The Petitioners also contended that the denial of ITC

under Section 17(5)(d) of the CGST Act had led to a

sharp and inevitable increase in cost which the owner

of the building was compelled to incur. This had also

rendered the construction uncompetitive as compared

to similar built-up units existing previously. Therefore,

such a discrimination was violative of the fundamental

right to carry on business granted under article

19(1)(g) of the Constitution of India.

Lastly, the Petitioners argued that it was a settled

posit ion of taxat ion statute that only such

interpretation was to be adopted which avoided or

obviated double taxation. However, denial of ITC in

the instant case, was clearly against the intention of

the legislature and frustrated the object sought to be

achieved by the legislature in enacting the GST

legislations.

”“ ITC shall be available tobuilders engaged in constructionservices for letting out of units.

53 M/s Safari Retreats Pvt Ltd and Another v. Chief Commissioner of Central Goods and Service Tax and Others, 2019-VIL-223-ORI.54 Section 17(5)(b) of the CGST Act states that ITC shall not be available on “goods or services or both received by a taxable person for construction of an immovable property

(other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.”

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On the contrary, the Respondent argued that the

assessees could not claim ITC as a matter of right and

a provision under the GST legislations could not be

rendered unconstitutional merely because the set off

of ITC was restricted under it. Further, they contended

that the legislative intent under Section 16 of the

CGST Act was not to provide an absolute entitlement

to ITC. This was evident from the power provided

under Section 16(1) to restrict the availment of ITC.

The Respondent also contended that the decision of

the legislature to allow or disallow the ITC could not be

challenged under the judicial review mechanism as

the legislature was the best judge of the community.

Lastly, the Respondent argued that a legislation or a

provision could be invalidated only when it evidently

violated the provisions of the Constitution. Where two

views on a provision were possible, the one upholding

the constitutionality of the statute had to be preferred,

even if the same resulted in narrow construction.

DECISION

The HC held that a narrow interpretation of Section

17(5)(d) of the CGST Act, as suggested by the

Respondents, would frustrate the very purpose of the

legislations. The HC observed that the Petitioner

would have to pay a huge sum without any basis. The

HC stated that the transaction at hand could not be

equated with construction of an immovable property

which was meant to be sold after obtaining a

completion certicate since this lead to a break in the

supply chain where ITC could not be claimed. The HC

held that the instant case was different as the intention

of the builder was to let out the immovable property

and not sell it. In such a situation, there could be no

break in the supply chain and denial of ITC was

arbitrary, unjust and oppressive.

In light of the above, the HC held that the interpretation

of Section 17(5)(b) of the CGST Act, as contended by

the Respondents, was not acceptable. The HC,

therefore, held that Section 17(5)(b) of the CGST Act

would not be applicable to assessees who are

engaged in construction of buildings for supply for

rental services.

SIGNIFICANT TAKEAWAYS

This decision of the HC is yet another instance

wherein the court exercised its power to construct the

law and amplify the scope of a statute so as to reduce

the tax blockage, in the spirit of GST. However, the HC

has clearly ignored certain settled position of law

including that a literal interpretation shall be given to

taxing statute, and that ITC cannot be claimed an

absolute right.

It other petition have petitions challenging This

decision also comes up as a major relief for builders

(especially those engaged in construction of

commercial properties such as malls, hotels,

restaurants, ofces) who are currently burdened with

a huge amount of accumulated ITC resulting in high

operation costs. Such burden was furthered by higher

GST liability on such output supplies, which ultimately

lead to an increase in cost for the end consumer.

However, recently, in a ruling passed by the AAR, it

was held that ITC would not be available to hotels on

certain inputs used in renovation of hotel considering

the same to be ‘construction of immovable property’.

Though, the ruling of the AAR is not binding on anyone

other than the applicant itself, the stand of the

department is leading to a state of confusion.

Additionally, it is most likely that the GST authorities

will le an appeal before the SC. In such a case, it will

be worthwhile to wait for the nding of the SC on this.

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TRANSITIONAL CREDIT PERMISSIBLE WHERE NO

REFUND WAS CLAIMED UNDER ERSTWHILE LAW

54

55In M/s Magma Fincorp Limited , the division bench

of the Telangana HC observed that where the revenue

admitted that the taxpayer was entitled to refund of a

Net Credit Carried Forward (“NCCF”) at the time of

bifurcation of Telangana and Andhra Pradesh, the

taxpayer is entitled to claim transitional relief against

such NCCF under the Telangana GST Act.

FACTS

Magma Fincorp Limited (“Petitioner”), registered

under Central and State GST Act and erstwhile

Telangana VAT Act, 2005, was engaged in the

business of leasing and nancing of vehicles and

equipment. The Petitioner was entitled to ITC of INR

1.79 crore, as on the date of bifurcation of the state of

Andhra Pradesh and Telangana i.e. June 2, 2014.

Pursuant to the b i furcat ion of the s tates,

Commissioner of Commercial Taxes issued a circular

dated May 12, 2015 whereby, Petitioner became

entitled to claim NCCF in the state of Telangana (the

state to which the Petitioner migrated upon

b i fu rca t ion) . The to ta l ITC

available to the Petitioner, as on

the date of migration, was INR

1.77 crore. By July 1, 2017, i.e.,

the date of implementation of GST,

the balance ITC was of INR 1.43

crores. The Petitioner led its

returns up to June 30, 2017, under

the Telangana VAT Act, 2005.

Section 140 of the Telangana GST Act, 2017 entitles

the registered dealers to take the amount of credit

carried forward in their returns furnished under the

erstwhile law, in their electronic credit ledgers.

Accordingly, the Petitioner led TRAN-1 under the

Telangana GST Act, 2017 for transfer of ITC of INR

1.43 crores as transitional credit available to it. The

Assistant Commissioner vide notice dated May 28,

2018 advised the Petitioner to not claim such

transitional credit. Petitioner led a reply to this notice,

however, no adjudication orders were passed on the

same. The Assistant Commissioner issued another

notice dated October 5, 2018. The Assistant

Commissioner after the ling of reply by the Petitioner

and granting personal hearing to the Petitioner,

passed an order rejecting the transitional relief and

demanded payment of an equivalent amount on the

ground that it was an excess claim. The Petitioner

assailed this order by ling the present writ petition.

ISSUES

Whether Petitioner was entitled to carry forward the

transitional credit reecting as per returns furnished

under the erstwhile law, in its electronic credit ledger

under Telangana GST Act, 2017?

ARGUMENTS

The Petitioner contended that it was entitled to

transitional relief under section 140(1) of the

Telangana GST Act, 2017 and

none of the three conditions

limiting the applicability of section

140(1) prescribed in the proviso to

section 140(1) were satised in the

present case. Additionally, the

Petitioner argued that (i) multiple

notices by persons holding ofce

at different points of time were bad in law; (ii) the

impugned order was passed on the basis of provisions

of law which were inapplicable; (iii) the circular issued

by Commissioner of Commercial Taxes had no

application to GST law.

The revenue contended that the Petitioner ought to

have utilized the benets of its NCCF against the

liabilities in the monthly VAT or CST returns or the

assessed liabilities under both VAT and CST; or

”“ Purposive interpretation

should be given to transitional provisions under the GST law.

55 Magma Fincorp Limited v. State of Telangana, Finance Department, Hyderabad and Others, Writ Petition No. 46792 of 2018.

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claimed a refund. As (i) the Petitioner did not avail

these options, (ii) assessment for the period was

already completed and (iii) Telangana GST Act, 2017

does not provide for utilization of NCCF as transitional

relief, the Petitioner was not entitled to the transitional

relief under Section 140 (1) of the Telangana GST Act,

2017.

DECISION

The Telangana HC observed that the Petitioner was

entitled to refund against the amount of NCCF or seek

adjustment of their liability under the GST regime.

The HC stated that as (i) there were no provisions in

the Telangana GST Act, 2017 to suggest that NCCF

were inadmissible as ITC under the Telangana GST

Act, 2017; and (ii) Petitioner had furnished all the

returns required under the erstwhile law, the

conditions limiting the grant of transitional relief in the

rst proviso to section 40(1) of the Telangana GST

Act, 2017 were not satised and as such, the

Petitioner was entitled to transitional relief under

section 140(1) of the Telangana GST Act, 2017. The

HC observed that when the revenue itself admitted

that the Petitioner was entitled to refund against the

unutilized NCCF, the revenue ought to have given a

purposive interpretation to section 140 of the

Telangana GST Act, 2017. In light of these

observations, the HC remanded back the matter to

Assistant Commissioner of Sales Tax for fresh

consideration in light of the aforementioned

observations.

SIGNIFICANT TAKEAWAYS

The decision is in line with the approach of the higher

judiciary in previous cases involving the question of

availability of transitional credit to tax payers. The

courts have been liberal in their approach in allowing

taxpayers to le their claims for input credit and have

passed orders directing concerned ofcers to allow

easy access to the por ta ls and ass is t in 56implementation and administration of GST law.

While the nal order of the Assistant Commissioner of

Sales Tax is not traceable, it is expected that the order

of the Assistant Commissioner of Sales Tax would

ensure smooth transition from pre-GST regime to

GST regime.

The decision is a welcome ruling for all the taxpayers

facing issues in claiming transitional credits under the

GST regime. The ruling reinforces the settled

principle of law that substance should be preferred

over form, and if a taxpayer is entitled to a relief under

a statute, then such relief should not be denied on

mere technicalities.

56 Abicor & Binzel Technoweld (P.) Ltd. v. Union of India, [2018] 91 taxmann.com 187 (Bombay); Continental India (P) Ltd v. Union of India, Writ (Tax) No. 67 of 2018.

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NOT MANDATORY TO SET UP PERMANENT BENCH

OF TRIBUNAL AT PLACE WHERE PERMANENT SEAT

56

57In Oudh Bar Association , the Allahabad HC held

that the State Bench of the GST Tribunal in Uttar

Pradesh, would be set up at Lucknow based on the

rst proposal written regarding constitution of GST

Tribunal.

FACTS

A proposal was made by the State Government

recommending that the State Bench of the GST

Tribunal should be established at Lucknow. The

proposal was revised on March 15, 2019 on account of

an order of the Allahabad HC dated 58

February 28, 2019 , which relied on

the decision of the Supreme Court 59in Madras Bar Association . It

was thus proposed to set up the

State Bench of GST Tribunal at

Allahabad instead, due to the

Principal Bench of the HC being situated there.

Aggrieved by the revised proposal / letter, the Oudh

Bar Association (“Petitioner”) led a writ petition

before the Allahabad HC praying quashing of the

revised letter/proposal.

ISSUE

Whether the permanent Bench of a Tribunal can be set

up only where the “Principal Seat” of the HC is

situated?

ARGUMENTS

The Petitioner submitted that the judgment of Madras 60

Bar Association did not mandate constitution of

Tribunal where the Principal Bench of the HC was

situated. Furthermore, the interlocutory order passed

by the Allahabad HC did not give directions for

constitution of State bench of the GST Tribunal at

Allahabad, it was merely an observation. The only

direction given by the HC was with regards to giving a

cut-off date by which the bench of the Tribunal should

be set-up. Therefore, the observation made by the HC

was in the nature of an obiter dicta and not binding.

The Petitioner submitted that section 109 of the CGST

Act, provides that the Government may on

recommendation of the GST Council, by notication,

constitute regional benches as may be required.

Accordingly, the Petitioner argued that under the

CGST Act, constitution of benches

of GST Tribunals falls within the

domain of the Government based

on the recommendation of the GST

Council. The HC had no power to

interfere in such a matter.

It was further submitted that the rst

proposal had been consciously made by the State

Government, keeping in mind the various aspects of

the pre-GST Tribunal. The Respondent had no

occasion to revise its proposal without recording due

reasons.

61The Petitioner also relied on a decision of the SC to

state that there was no permanent seat of the HC at

Allahabad. The seats at Lucknow and Allahabad were

of equal status. It was thus open for the State

Government to constitute the GST Tribunal at either of

the two places, or even at both the places.

The respondent, on the other hand, argued that the

revised proposal was sound under the provisions of

the CGST Act as the requisite procedure was followed.

It was further argued that the order of the HC was

directory in nature and required a revision of the earlier

proposal under law.

”“Permanent Bench of Tribunal

can be set up wherever a Seatof the HC is situated.

OF HC IS SITUATED

57 Oudh Bar Association High Court, Lucknow through General Secretary and Another v. UOI through Secretary, Ministry of Finance & Ors. PIL Civil No. 6800 of 2019. 58 Writ Petition No. 655 (Tax) of 2018.59 Madras Bar Association v. UOI, (2014) 10 SCC 1. 60 Madras Bar Association v. UOI, (2014) 10 SCC 1.61 Nasiruddin v. STA, Tribunal, (1975) 2 SCC 671.

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DECISION

The Allahabad HC noted that the judgment in Madras 62Bar Association did not use the word “Principal Seat”

for establishing a permanent Bench of a Tribunal. The

words used were “Seat of the HC”.

The HC relied on judicial precedents to observe that

while there were two seats of the HC, none of them

were permanent. Therefore, the State Bench of the

GST Tribunal could be set up at either Lucknow or

Allahabad or at both.

The HC accepted the Petitioner’s contention that its

earlier order was observatory and in the nature of an

obiter dictum. There was thus no occasion for the

State Government to review its earlier proposal. Thus,

it was held that the revised proposal was not

sustainable on facts and in law.

The HC did not venture into the merits of opining

where the State Bench of the GST Tribunal should be

situated as such a decision was exclusively under the

domain of the Government and the GST Council

under the CGST Act.

Accordingly, the revised proposal was quashed and it

was ordered that the earlier proposal be acted upon

within three months. Further, the HC also observed

that various tribunals and forums are not working on

account of there being no Presiding Ofcer, and the

same is causing serious prejudice and difculties to

litigants. Therefore, the HC directed the Chief

Secretary of the State to ensure that the unlled posts

in the Tribunal and other Forums are lled within 12

weeks and submit compliance report at the end of 12

weeks.

SIGNIFICANT TAKEAWAYS

In this judgment, the HC has recognized and

respected the domain of the Government and the GST

Council under the CGST Act and has consciously

refused to overstep beyond its domain and interfere

with the decisions of the Government in relation to

setting-up of a State bench of the GST Tribunal.

The HC has also recognized the hardship and

prejudice being caused to litigants due to non-

functioning of various Tribunals and Forums. The HC

has therefore directed the Chief Secretary of the State

to make an earnest endeavour and ensure all unlled

posts are lled within the specied time to protect the

right to appeal of the litigants and ensure justice is

imparted in an efcient and effective manner.

62 Madras Bar Association v. UOI, (2014) 10 SCC 1.

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DGAP IS LEGALLY BOUND TO INVESTIGATE A

PROFITEERING CASE ONCE REFERRED OR NOTICED

58

63In M/s Puri Constructions Pvt. Ltd., the NAA held

that where a person engaged in real estate business

did not periodically transfer the benet of ITC to its

buyers, such person was liable for proteering.

FACTS

M/s Puri Construction Pvt. Ltd. (“Respondent”) was

engaged in the business of construction and sale of

ats and buildings in the State of Haryana. A complaint

was led by Ms. Pallavi Gulati and Abhimanyu Gulati

(“Applicants”), who had purchased a at in the

‘Anand Vilas’ Project, Faridabad, Haryana, (“Project”)

launched by the Respondent. The Applicants alleged

that the Respondent had not passed on the benet of

increase in available ITC pursuant to the change in tax

regime.

The DGAP issued a notice of initiation of investigation

to the Respondent on March 14, 2018, and granted

opportunity to the Respondent to

inspect the non-condential

documents submitted by the

Applicants. It also offered the

Applicants opportunity to inspect

non-condent ia l documents

submitted by the Respondent.

Subsequently, the Applicants informed the DGAP that

they had discussed the matter with the Respondent,

and were satised with the clarication provided. They

did not have any further grievances, and therefore, the

complaint could be treated as withdrawn. Thereafter,

the Respondent made submissions to the DGAP,

intimating it of withdrawal of the complaint. The

Respondent, in order to express his bona de, also

submitted that it intended to compute the benet of

ITC and pass the same to the Applicants, but this could

be done only after completion of the Project.

However, a detailed investigation had already been

conducted by the DGAP and it was concluded that the

Respondent had proteered. Based on the

investigation the Respondent was issued an SCN

alleging the Respondent’s proteering and seeking to

impose penalty for the same.

ISSUES

1. Whether withdrawal of complaint was sufcient

to stop anti-proteering proceedings?

2. Whether penalty could be levied under the anti-

proteering provisions?

ARGUMENTS

The Respondent argued that since the Applicants had

withdrawn their application, the investigation of the

DGAP should have stopped and the report submitted

by them was not to be accepted.

The Respondent pleaded that he had

never denied to pass on the benet to

the buyers and the same is evident

from the communication made by

him to the buyers. He further argued

that the computation of the benet or

loss could not be done before

completion of the project as the

calculation, if done earlier would not have given the

true account of the actual benet accruing to it.

Additionally, he pleaded that sale of a building after

issuance of Occupancy Certicate (“OC”) required

reversal of ITC availed and if some of the ats

remained unsold till that time, it would be incorrect to

pass the ent ire benet accruing to buyers

immediately.

The Respondent further argued that he was also

required to follow the guidelines of the Real Estate

Regulatory Authority, Haryana (“RERA”). In terms of

the RERA legislations, as he was not allowed to

increase the prices, in case he passed on the benet

”“DGAP is legally bound to

complete its investigation against profiteering.

63 Ms. Pallavi Gulati vs. Puri Constructions (P.) Ltd., [2019] 105 taxmann.com 250 (NAA).

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accrued to it immediately (without taking into account

the reversal of credit) he would not be able to recover

the losses computed on completion of the project.

The Respondent argued that a difference in ITC

availed did not tantamount to him proteering under

the new regime. The increased ITC was simply due to

an increase in the tax paid by him on inputs and did not

amount to proteering. The Respondent argued that

penalty could not be imposed as it lacked mens rea to

justify imposition of penalty. The Respondent always

intended to pass on the benet post the completion of

the project and the same was also communicated to

the buyers. This is further proved by the fact that he

had transferred benet, after completion, post-GST, in

his other projects as well. It was argued that the anti-

proteering clause had been introduced recently

under the GST regime and the DGAP should act

leniently with respect to imposition of penalty. For this,

he relied on the statements made by the Finance

Secretary which stated that the DGAP would only

investigate cases of mass impact.

The Respondent further argued that penalty could not

be legally imposed under the anti-proteering

provision. This was since penalty could only be

imposed under Section 122-127 of the CGST Act read

with Rule 133 of the CGST Rules. None of these

provisions provided for imposition of penalty when the

person in question had proteered. Allowing penalty to

be imposed, in the absence of a specic provision,

would amount to “excessive delegation”. Further, the

SCN issued to him mentioned the aforementioned

Sections but did not specify the exact allegations

which allowed for attraction of said Sections. Thus, the

SCN itself was vague and arbitrary, and therefore bad

in law.

The Respondent argued that the methodology of

computation of proteered amount applied by the

DGAP was arbitrary as there was no prescribed

procedure under the CGST Act and a standard

method could not be applied by the DGAP to various

industries. Moreover, there was no nexus between the

taxable turnover and ITC as construction continued

even if instalments were not paid by the buyers. The

DGAP had thus failed to take into account crucial

factors of the business of the Respondent for its

computations.

The Respondent lastly argued that the DGAP had

travelled beyond its power by extending the scope of

its investigation by including other units and projects of

the Respondent, apart from the unit in the Project for

which the investigation was initiated. This was done

without any recording of reasons in relation to

furthering the investigation.

On the other hand, the DGAP submitted that though

the proceedings were required to ow from an

application, there was no legal provision which

allowed the withdrawal of the application. Additionally,

it submitted that since an application was led by the

Applicants, the DGAP was bound to complete its

investigation and hence, mere withdrawal of

application was not a valid reason for the closure of the

investigation.

The DGAP further argued that even if the exact

amount of benet of ITC could only be calculated at

the time of handover of possession, it had no bearing

on the legal responsibility of the Respondent under the

provisions of the CGST Act to pass on the benet of

ITC. The DGAP submitted that even if some of the ats

got cancelled, the Respondent could have taken its

losses into account while determining the price of the

at to be paid by the prospective buyers.

The DGAP presented evidence to show that the

Respondent had in fact benetted from additional ITC

during the post-GST period. He further contended that

the addi t ional ITC would have resul ted in

commensurate reduction of cum-tax price for the

Respondent. Moreover, the benet of additional ITC

was greater than the increase in the rate of tax. The

DGAP also incorporated the changes due to the

mitigating factors alleged by the Respondent, and

revised its initial report to re-compute the proteered

amount. The DGAP also submitted detailed evidence,

justifying the methodology used by him for

computation of the proteered amount. The DGAP

also contended that the Respondent had passed

lesser benet than what the buyers were entitled to,

even in his other units/projects. Accordingly, the

DGAP thus concluded that the Respondent had

proteered from the Applicants.

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DECISION

The NAA noted that no provision for withdrawal of

complaint was available under the GST legislation.

The DGAP was legally bound to investigate into the

offence of proteering, once it came to its notice.

The NAA observed that the Respondent had taken

benet of ITC regularly for six years and he could not

be allowed to unjustly enrich himself at the cost of the

buyers till the completion of the project. He was legally

bound to periodically transfer the benet to the buyers.

Any contingencies, as alleged, could have been

factored in by the Respondent during calculation of the

benet. Moreover, change in tax rates would be duly

reected in the quantum of ITC available to the

Respondent.

The contention of the Respondent regarding unsold

ats remaining with him was not held to be tenable, as

he was only required to transfer benet to those

buyers who had paid instalments post-GST. The NAA

held that the transfer of benet of ITC was not

dependent on the supplier himself getting benet from

its vendors. Every registered supplier was legally

required to transfer benet to the buyer. It was further

ruled that the Respondent could not question the

method adopted by the DGAP in calculating the

proteered amount as the methodology varies on a

case-to-case basis. The NAA accepted the

Respondent’s contention that no penalty could be

levied for proteering in the absence of a specic

provision. However, the consistent denial of benet to

buyers by the Respondent showed mala de on his

part. The NAA held that the Respondent could not

claim that the scope of the investigation was ultra vires

when he himself had furnished details of his other

projects as evidence. Furthermore, even the revised

report by the DGAP reected undue gains on the part

of the Respondent. The revised report was based on

information provided by the Respondent and had not

been challenged by the Respondent.

Accordingly, the Respondent was ordered to transfer

the proteered amount, as calculated by the DGAP.

SIGNIFICANT TAKEAWAYS

As the anti-proteering law is still evolving, every other

decision of the NAA gives clarity on new aspects

relating to anti-proteering. With this judgment, the

NAA has claried the stern nature of the anti-

proteering provision under the Act. The NAA claried

that it is not a right given to the complainant but a

method for the authorities to gure out if an offence is

being committed. This is in line with the present

government’s stringency in checking against

proteering under the GST regime.

60

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REGULATORY DIRECT

TAX UPDATES

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INDIA-MARSHALL ISLANDS TAX INFORMATION

EXCHANGE AGREEMENT NOTIFIED

55 The CBDT vide Notication dated May 21, 2019, has

notied the provisions of Tax Information Exchange

Agreement (“TIEA”) between India and the Marshall

Islands. The Marshall Islands is a chain of volcanic

islands and coral atolls in the Pacic Ocean, between

Hawaii and the Philippines. The TIEA, signed on

March 18, 2016, came into force on December 6,

2018, with the completion of relevant procedures for

ratication by governments of India and the Marshall

Islands. The TIEA will enhance mutual cooperation

between India and the Marshall Islands by providing

an effective framework for exchange of information on

tax matters which will help curb tax evasion and tax

avoidance.

The text of the TIEA is largely consistent with the

OECD Model TIEA. The TIEA, aimed at facilitating the

exchange of information between the governments of

India and the Marshall Islands, covers information

pertaining to all Central, state and local taxes levied in

either country. The information shared would be

restricted to that which is ‘foreseeably relevant’ to the

administration and enforcement of tax laws in the

country making the request for information. Further,

the information may be requested regardless of

whether it is sought for the purpose of tax

assessments in the country making the request. It may

also be noted that the TIEA does not incorporate a

provision for assistance in tax collection, which is

present in certain other TIEAs, such as the India-

Argentina TIEA. Accordingly, India would not be in a

position to request the Marshall Islands to collect

Indian taxes from a defaulter on behalf of the Indian

Government, and vice versa.

Both Marshall Islands and India are already

signatories to the Multilateral Competent Authority

Agreement for Automatic Exchange of Information

(“MCAA”), under which information is required to be

automatically exchanged and such information need

not be ‘foreseeably relevant’ to tax assessment in any

country. While Marshall Islands has notied India,

India has currently not notied Marshall Islands as a

jurisdiction with which it shall engage in automatic

exchange. A bilateral relationship under the MCAA

does not become effective until both jurisdictions have

listed each other in their notications. Therefore, the

exchanges between India and the Marshall Islands

are currently limited to that within the scope of the

TIEA.

What is of particular import is that the TIEA does not

provide for a particular date or nancial year starting

which the exchange request regime may be activated.

For instance, the TIEA with Liechtenstein allows for

requests for information with regard to tax years

beginning on or after 1st April, 2013. For period before

April 01, 2013, it has been agreed by way of Protocol

that the information may be sought only in limited

cases like in case of an ongoing investigation.

However, the Marshall Islands TIEA does not

contemplate any such limitation period. The CBDT’s

Manual on Exchange of Information declares that

once the tax treaty is in force, information may be

requested for a period prior to the entry into force of the

treaty, in both civil and criminal tax matters, unless

specic provisions to the contrary are incorporated in

the treaty.

Accordingly, individuals, companies and other entities

with assets or investments in either jurisdiction must

be aware of the risk of information requests pertaining

to activities, even if prior to December 6, 2018.

62

55 Notication No. S.O. 1789(E) dated May 21, 2019.

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TAX UPDATES

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APPLICABILITY OF GST ON ADDITIONAL/PENAL

INTEREST

Circular No. 102/21/2019-GST, dated June 28, 2019

claried the applicability of GST on additional/penal

interest imposed for delayed payment of equated

monthly installments (“EMI”) in the following

scenarios:

(I) Where the supplier of goods provides an option

to the customer to buy goods on EMI basis and

charges additional/penal interest for delayed

payment. In such a scenario, EMI is charged

towards the supply of goods. Therefore, any

additional/penal interest for delay would be

included in the value of goods supplied and

taxed accordingly, irrespective of the manner of

invoicing adopted by the supplier.

(ii) Where the recipient of goods takes a loan from a

third-party other than a supplier of goods. Such

loan services provided by third-party would be

exempted, where the considerat ion is

represented by way of interest. It claried that

additional/penal interest for delayed payment

satises the denition of “interest” existing

under the exemption notication, Notication

No. 12/2017- Central Tax (Rate) dated June 28,

2017. Such additional/ penal interest do not fall

within the ambit of entry 5(e) of Schedule II of the

CGST Act i.e. “agreeing to the obligation to

refrain from an act, or to tolerate an act or a

situation, or to do an act”.

TREATMENT OF POST-SALES DISCOUNTS

UNDER GST

Circular No. 105/24/2019-GST, dated June 28, 2019

claried the following in relation to secondary or post-

sale discounts:

(i) Where a post-sale discount is given by a

supplier of goods to a dealer without any further

obligation or action required from the dealer’s

end, then such discount would not form part of

value of supply, subject to prescribed

conditions.

(ii) Where the dealer is required to undertake any

activity like special sales drive, advertisement

campaign, etc., for receiving discounts as post-

sale incentive, such activity undertaken would

be treated as a separate transaction and the

dealer would be deemed to be the supplier of

such additional supplies. Such supply would be

exigible to GST on this value.

(iii) Where additional discount is given by the

supplier of goods to the dealer to offer a special

reduced price to the customer of dealer to

increase volume of sales, the same would be

treated as consideration and form part of the

value of supply.

(iv) Where post-sale discount, unknown at the time

of agreement, on supply of goods is granted

through commercial/nancial credit note, the

same is not permitted to be excluded from the

value of supply. However, the recipient would

remain eligible for ITC on the original amount of

tax paid.

CLARIFICATION REGARDING PLACE OF SUPPLY

IN RESPECT OF SERVICES PROVIDED BY PORTS

Circular No. 103/22/2019-GST, dated June 28, 2019

claried that the services provided by a port authority

such as services in respect of arrival of wagons at port,

haulage of wagons inside port area up-to place of

unloading, siding of wagons inside the port, unloading

of wagons, movement of unloaded cargo are ancillary/

related to cargo handling. Therefore, the place of

supply of such services would be the location of

recipient, in case of a registered person or in case of

an unregistered Indian recipient the address existing

on record. In other cases, it would be the location of

the supplier.

REFUND OF TAXES TO THE RETAIL OUTLETS

ESTABLISHED IN DEPARTURE AREA IN AN

I N T E R N AT I O N A L A I R P O R T B E Y O N D

IMMIGRATION COUNTERS ON MAKING TAX

F R E E S U P P LY T O A N O U T G O I N G

INTERNATIONAL TOURIST

The Central Government vide Notication No. 56

31/2019 – Central Tax, dated June 29, 2019 inserted

Rule 95A in the CGST Rules in relation to refund of

taxes to retail outlet located in the departure area of an

international airport, beyond immigration counters.

64

56 Read with relevant State Notication; or Notication No. 10/2019-Integrated Tax (Rate), dated June 29, 2019.

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The refund of tax shall be available to them on

fulllment of following conditions:

(i) the inward supplies of goods were received by

the said retail outlet from a registered person

against a tax invoice;

(ii) the said goods were supplied by the said retail

outlet to an outgoing international tourist against

foreign exchange without charging any tax;

(iii) n a m e a n d G o o d s a n d S e r v i c e s Ta x

Identication Number of the retail outlet is

mentioned in the tax invoice for the inward

supply; and

(iv) such other restrictions or conditions, as may be

specied, are satised.

Such retail outlet shall furnish the application for

refund claim in Form GST RFD-10B.

REGULATIONS NOTIFIED FOR ELECTRONIC

INTEGRATION DECLARATION (“EID”) IN

RELATION TO EXPORT OF GOODS

The Central Government vide Notication No.

33/2019-Customs (N.T.), dated April 25, 2019 notied

the Shipping Bill (EID and Paperless Processing)

Regulations 2019, which is applicable to exports from

customs stations wherein the Indian Customs

Electronic Data Interchange System (“ICEGATE”) is

in operation.

The exporter or a person authorized by him

(“Authorized Person”) is required to enter the

particulars relating to the export of goods on the

ICEGATE along with uploading support ing

documents, by afxing his digital signature. The

Authorized Person is permitted to avail the services at

the service centre for the same.

The shipping bill shall be deemed to have been led

and self-assessment completed, respectively, when a

shipping bill number is generated on ICEGATE. On

payment of export duty, if any, the order permitting the

clearance of the goods for export under Section 51 or

Section 69 of the Customs Act shall be generated,

which may be conveyed electronically to the

Authorized Person.

The assessed copy of the shipping bill as well as

original copies of all supporting documents relied

upon are required to be retained for a period of ve

years from the date of presentation of the shipping bill.

DGFT AMENDED THE IMPORT POLICY FOR

ELECTRONICS AND IT GOODS

DGFT vide Notication No. 50/2015-2020 dated

January 08, 2019 (“Notication”) had notied that

import of goods listed under the Electronics and

Information Technology Goods (Requirement of

Compulsory Registration) Order, 2012 (“Order”),

would be allowed on fullment of certain conditions.

Vide Notication No 5/2019-2020 dated May 07, 2019,

the DGFT further amended the Notication as follows:

(i) General Note No. 2(c) was amended such that

the goods, import of which was prohibited,

would include new as well as second hand

goods, whether or not refurbished, repaired or

reconditioned.

(ii) It was claried that if the importer failed to re-

export such prohibited goods, the Customs

Authority would deform the goods beyond use

and dispose them as per the provision.

(iii) The condition of prohibition of import of such

goods was reiterated vide insertion of Policy

Condition No. 2 under Chapter 84 and Policy

Condition No. 5 under Chapter 85 of the

ITC(HS) 2017.

(iv) Para 2.31(l)(a) of the FTP is revised. The

photocopier machine/ digital multifunction print

and copying machine is now not restricted for

imports even without authorization.

INCREASE IN THE VALIDITY PERIOD OF EXPORT

AUTHORIZATION

The DGFT vide Public Notice No. 01/2015-20 dated

April 04, 2019 revised Para 2.16(a)(i) of the HBP to

enhance the validity period of export authorization for

restricted (Non-SCOMET) goods from twelve months

to twenty four months.

MECHANISM TO VERIFY IGST PAYMENTS FOR

GOODS EXPORTED OUT OF INDIA

CBIC vide Circular No. 16/2019- Customs dated June

17, 2019 mentioned that the exporters have availed

ITC on the basis of ineligible documents, fraudulently

utilized the ITC for payment of IGST, and effected

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higher IGST pay outs by having a huge variation

between the FOB value declared in the shipping bill

and the taxable value declared in the GST return.

Therefore, CBIC has introduced a mechanism to

verify IGST payments, for goods exported out of India,

through respective GST eld formations. Accordingly,

it modied the procedure, specied in the Instruction

15/2017-Cus dated October 09, 2017, as below:

(i) Identication of suspicious cases: The Director

General (System) would decide the criteria to

identify the risky exporters at the national level

and forward the list of such risky exporters to the

authorities along with information about the past

IGST refunds granted to such risky exporters

(along with their bank details).

(ii) Inserting Alert in the System- Risk Management

Centre for Customs (“RMCC”) would be

required to insert alerts for all such risky

exporters and make 100% examination,

mandatory of export consignments relating to

those risky exporters. Further, alert would also

be placed to suspend IGST refunds in such

cases.

(iii) Examination of the export goods- The Customs

Ofcer would examine the consignment as per

the RMCC alert and clear the same only if the

outcome tallies with the declaration in the

Shipping Bill subject to compliance with other

requirements.

(iv) Suspension of IGST refunds- Notwithstanding

the clearance of the export consignments as

above, Shipping Bills would be suspended for

IGST refund by the Deputy or Assistant

Commissioner of Customs dealing with refund

at the port of export.

(v) Verication by GST formations- The GST

formation would furnish a report to the

respective Chief Commissioner of Central Tax

within 30 days specifying clearly whether the

amount of IGST paid and claimed/ sanctioned

as refund was in accordance with the law or not.

(vi) Action to be taken by customs formation- If no

malpractice is reported on verication, the

Customs ofcer at the port of export would

proceed to process the IGST refund to the

extent veried by the GST Authorities.

However, if it is found during the verication that the

exporter availed ITC fraudulently or on the basis of

ineligible documents and utilized the said ITC for

payment of IGST claimed as refund, the customs

ofcer would not process the refund claim.

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GLOSSARY

ABBREVIATION MEANING

AAR Hon’ble Authority for Advance Rulings

AAAR Hon’ble Appellate Authority for Advance Rulings

ACIT Learned Assistant Commissioner of Income Tax

AE Associated Enterprises

AO Learned Assessing Officer

AY Assessment Year

Customs Act Customs Act, 1962

CbC Country by Country Reporting

CBDT Central Board of Direct Taxes

CBEC Central Board of Excise and Customs

CCR CENVAT Credit Rules, 2004

CEA Central Excise Act, 1944

CENVAT Central Value Added Tax

CESTAT Hon’ble Customs, Excise and Service Tax Appellate Tribunal

CETA Central Excise Tariff Act, 1985

CGST Central Goods and Service Tax

CGST Act Central Goods and Service Tax Act, 2017

CGST Rules Central Goods and Service Tax Rules, 2017

CIT Learned Commissioner of Income Tax

CIT(A) Learned Commissioner of Income Tax (Appeal)

CRISIL Credit Rating Information Services of India Limited

CST Central Sales Tax

CST Act Central Sales Tax Act, 1956

CT Act Custom Tariff Act, 1975

CVD Countervailing Duty

DCIT Learned Deputy Commissioner of Income Tax

DIT Learned Director of Income Tax

DGFT Directorate General of Foreign Trade

DRP Dispute Resolution Panel

DTAA Double Taxation Avoidance Agreement

EPCG Export Promotion Capital Goods

FMV Fair Market Value

FTP Foreign Trade Policy

FTS Fees for Technical Services

FY Financial Year

GAAR General Anti-Avoidance Rules

GST Goods and Service Tax

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ABBREVIATION MEANING

GST Compensation Act Goods and Services Tax (Compensation to States) Act, 2017

HC Hon’ble High Court

IBC Insolvency and Bankruptcy Code, 2016

IGST Integrated Goods and Services Tax

IGST Act Integrated Goods and Services Tax Act, 2017

INR Indian Rupees

IRA Indian Revenue Authorities

IT Act Income Tax Act, 1961

ITAT Hon’ble Income Tax Appellate Tribunal

ITC Input Tax Credit

ITO Income Tax Officer

IT Rules Income Tax Rules, 1962

Ltd. Limited

MAT Minimum Alternate Tax

MLI Multilateral Instrument

MoU Memorandum of Understanding

MRP Maximum Retail Price

NAA National Anti-profiteering Authority

OECD Organization for Economic Co-operation and Development

PCIT Learned Principal Commissioner of Income Tax

PE Permanent Establishment

Pvt. Private

R&D Research and Development

SC Hon’ble Supreme Court

SEBI Security Exchange Board of India

SEZ Special Economic Zone

SGST State Goods and Services Tax

SGST Act State Goods and Services Tax Act, 2017

SLP Special Leave Petition

ST Rules Service Tax Rules, 1994

TCS Tax Collected at Source

TDS Tax Deducted at Source

TPO Transfer Pricing Officer

UK United Kingdom

USA United States of America

UTGST Union Territory Goods and Services Tax

UTGST Act Union Territory Goods and Services Tax Act, 2017

VAT Value Added Tax

VAT Tribunal Hon’ble VAT Tribunal

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ACKNOWLEDGMENTSWe acknowledge the contributions received from S. R. Patnaik, Daksha Baxi, Mekhla Anand, Surajkumar Shetty,

Ankit Namdeo, Shiladitya Dash, Thangadurai V.P., Jesika Babel, Rupa Roy, Bipluv Jhingan, Shivam Garg, Reema

Arya, Akshara Shukla, Sanjana Rao and Shrishma Dandekar under the overall guidance of Mrs. Vandana Shroff.

We also acknowledge the efforts put in by Madhumita Paul to bring this publication to its current shape and form.

DISCLAIMER This Newsletter has been sent to you for informational purposes only and is intended merely to highlight issues.

The information and/or observations contained in this Newsletter do not constitute legal advice and should not be

acted upon in any specific situation without appropriate legal advice.

The views expressed in this Newsletter do not necessarily constitute the final opinion of Cyril Amarchand

Mangaldas on the issues reported herein and should you have any queries in relation to any of the issues reported

herein or on other areas of law, please feel free to contact us at the following co-ordinates:

Cyril Shroff

Managing Partner

Email: [email protected]

Daksha Baxi

Head - International Taxation

Email: [email protected]

S. R. Patnaik

Partner

Email: [email protected]

Mekhla Anand

Partner

Email: [email protected]

This Newsletter is provided free of charge to subscribers. If you or anybody you know would like to subscribe to

Tax Scout, please send an e-mail to , providing the name, title, organization or [email protected]

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If you are already a recipient of this service and would like to discontinue it or have any suggestions and comments

on how we can make the Newsletter more useful for your business, please emai l us at

[email protected].

Cyril Amarchand Mangaldas

Peninsula Chambers, Peninsula Corporate Park, GK Marg, Lower Parel, Mumbai - 400 013 (India)

Tel: +91 22 2496 4455 Fax:+91 - 22 2496 3666

Website: www.cyrilshroff.com

Other offices: New Delhi Bengaluru Hyderabad Chennai Ahmedabad

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