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VINAY BHUSHAN AND ASSOCIATES

INTERNATIONAL TAXATIONSeptember, 2021

Reassessment can be initiated based on materials which weren’tconsidered during original assessment [ M/s Cairn India Ltd V. DeputyDirector of Income-Tax-I, (International Taxation), Chennai [2021] 130

taxmann.com 167 (Madras) [01-09-2021]

Cairn Energy India Private Limited [“CEIPL”] and Cairn Energy Plc[“CEPLC”] has entered into a GuaranteeFee agreement on 1st April 2005 in terms of which CEPLC has guaranteed the loan facility of US$ 48 mnextended to CEIPL by Royal Bank of Scotland Plc.Further CEIPL and CEPLC have entered into another agreement on 27 June 2006 in terms of which CEPLChas guaranteed the revolving credit facility of up to US$ 425 mn extended to CEIPL by a syndicate ofbanks.During the year under assessment the assessee company has paid Rs.14,91,73,063/- to CEPLC asguarantee fee charged @ 1.5% of the loan facility guaranteed as per the Guarantee Fee. This fee is paidin lieu of the risk undertaken by CEPLC in providing the guarantee on behalf of CEIPL.The petitioner company filed its return for the year 2007-2008. The petitioner’s case was selected forscrutiny. After completing all the procedures, the assessment order was passed on 24.02.2011 underSection 143(3) of the Income Tax Act.The case was reopened by the Income Tax Department because the assessing officer had a “reason tobelieve '' that there was income which had escaped assessment.

Whether the Assessing Officer was right in re-opening the case because of sufficient “reason to believe”that some income has escaped assessment or was it merely a change of opinion.

FACT OF THE CASE:1.

2.

3.

4.

5.

ISSUE:

OBSERVED:The reason given by the Assessing Officer that no TDS was deducted for the payment effected in Foreigncurrency towards loan guarantee interest was sufficient reason to believe that income might have escapedthe assessment

HELD:The reason given by the Assessing officer that no TDS was deducted for the payment effected in Foreigncurrency towards loan guarantee interest was sufficient reason to believe that income might have escapedthe assessment therefore the case can be reopened and the petitioner is bound to participate in thereopening proceedings for the purpose of defending their case by availing the opportunities to be providedby the authorities in accordance with law.

VBA comments: The Assessing Officer having a sufficient reason to believe that income might have escape Assessment isenough reason to reopen the case for scrutiny.

Income earned by company from sale of software licenses and incomefrom support, maintenance and training services rendered in relation to

such software licenses sold through third parties in India was notchargeable to tax as "Royalty" under section 9 as well as under article 12of DTAA [BMC Software Asia Pacific Pvt Ltd. V. Assistant Commissioner of

Income-tax, (International Taxation), Circle-1, Pune [2021] 130taxmann.com 205 (Pune - Trib.) [08-09-2021]

1)BMC Software Asia Pacific Pte Ltd. (hereinafter referred to as “assessee”), is a Singapore basedcompany. It did not file its return of income for the year 2010-11.

FACT OF THE CASE:1.

Whether the revenue earned from sale of software and rendering of the related services for the softwareis chargeable to tax as “Royalty” under the Act as well as the DTAA? Whether the reassessment was valid?

2.The (AO) observed that the assessee earned income from sale of Software Licenses services provided in relation to such software licenses during the previous year relating to 2010-11 for which no return of income was filed and initiated re-assessment proceedings u/s 148 of the Act. 3.The assessee submitted that it was not the owner of the software licenses rather it was only permitted to distribute such software licenses in the Asia Pacific region. 4.AO canvassed a view that the payment received by the assessee for supply of software related services constituted “Royalty” under the Act as well as the Double Taxation Avoidance Agreement (DTAA) between India and Singapore and computed the total income at Rs.48,01,58,318/-. 5.Assessee raised objections before the Dispute Resolution Panel (DRP) urging that it sold software licenses and the receipt was not in the nature of Royalty. 6.The DRP held that the action of the AO in taxing the amount was in accordance to law. Aggrieved thereby, the assessee filed appeal before the Tribunal.

ISSUE:

OBSERVED:i.The Tribunal agreed that the nature of receipt was sale of software and related services.

ii.The Tribunal relying on the recent decision of the Supreme court in case of Engineering Analysis Centre ofExcellence Pvt. Ltd. Vs. CIT (2021) 432 ITR 472 (SC) and Article 12(3) of the DTAA, said that the receipts ofRs.48.01 crore were on account of sale of Software/ license and rendition of services and the amount cannotbe brought within the ambit of ‘Royalties’ under Article 12 of the DTAA.

iii.The taxability of amount was also considered under Section 9(1)(vi) defining the term “royalty”.Explanation 4 clarifies that `the transfer of all or any rights in respect of any right, property or informationincludes and has always included transfer of all or any right for use or right to use a computer software(including granting of a licence) irrespective of the medium through which such right is transferred‟. TheTribunal also referred to the view of the SC in the abovementioned case that the Explanation 4 to section9(1)(vi) inserted vide the Finance Act 2012 is not clear as it expands the scope and hence prospective andheld that the assessment year under consideration is 2010-11 and hence the Explanation cannot apply tothe facts of the case

iv.As the receipt in the hands of the assessee did not bear the character of ‘Royalty’, it was said to be in thenature of ‘Business Profits’ under the DTAA and to bring Business Profits of a resident of the other countryto tax in India within the ambit of Article 7, the foreign entity needs to have a Permanent Establishment (PE)in India in terms of Article 5 of the DTAA.

HELD:As the assessee did not have a permanent establishment in India, the Income was held to be not taxable inIndia. The reassessment was also set aside on the grounds that the AO had ordered the reassessment solely onthe ground of income being Royalty. As the income was held not to be royalty under the DTAA, the reasonsfor reassessment stood invalid.

VBA comments: Once it is held that the receipt in the hands of the Assessee does not bear the character of “Royalty”, it will bein the nature of “Business Profits‟ under the DTAA. In order to bring `Business profits‟ of a resident of theother country to tax in India within the ambit of Article 7, it is sine qua non that the foreign enterprise musthave a Permanent Establishment (PE) in India in terms of Article 5 of the DTAA. In the absence of a PE, thetaxability under Article 7 does not trigger and hence, the income can’t be bought to India

Where there was alleged interest-free debt funding of a fully ownedoverseas special purpose Vehicle (SPV) to use fund for overseas

acquisition of a target company, it was held that there cannot be atransaction of interest-free debt funding of overseas SPV by its sponsor;even if such a transaction is at all hypothetically possible, arm's length

interest on such funding will be 'nil' [Bennett Coleman & Co. Ltd. V. DeputyCommissioner of Income-tax [2021] 129 taxmann.com 397 (Mumbai - Trib.)

[30-08-2021]

Bennett Coleman & Co. Ltd., (hereinafter referred to as “assessee”) had a fully owned subsidiary namely,Times Infotainment Media Ltd (TIML-India, in short).The assessment years in consideration are 2010-11 to 2012-13.There was an interest-free debt funding by the assessee of its fully owned overseas subsidiary company,which was in nature of a special purpose vehicle (SPV), with a corresponding obligation to use fund forpurpose of overseas acquisition of a target company abroad. When the transaction came up for scrutiny before the Transfer Pricing Officer, he was of the consideredview that the amount has been as a loan by the assessee in its annual return, and, therefore, thebenchmarking of this loan transaction is required to be done as "an independent entity would havecharged interest on such a transaction".The plea of the assessee that the activity was in the nature of the stewardship activity was rejected.The claim of the assessee that the loan was in the nature of quasi-equity and as it was for the purposeof making strategic investments for and on behalf of TIML India and the Times Group, and, therefore, thearm's length price adjustment for the interest was not warranted. This plea did not find favour with theTPO.

i.Whether an interest-free debt funding of an overseas company in the nature of a special purposevehicle (SPV), with a corresponding obligation to use it for the purpose of acquisition of a targetcompany abroad, can be compared with a loan simpliciter, and be subjected to an arm's length priceadjustment, on the basis of Comparable Uncontrolled Price (CUP) method?

FACT OF THE CASE:1.

2.3.

4.

5.6.

ISSUE:

OBSERVED:i.Under CUP method, arm's length price of funding of SPVs by assessee company, or providing them withwherewithal to achieve objectives of SPVs which were determined by commercial exigencies of assessee-company, is 'nil'. ii.If there has to be an arm's length consideration under CUP method, other than interest, for such funding,it has to be net effective gains - direct and indirect, attributable to risks assumed by 'sponsorer of SPV' to'SPV'.iii.ITAT observed that there was an error in not appreciating the fact that the subject transaction ofprovision of funds by the Appellant to its AE cannot be compared to a simpliciter loan transaction betweena financial 1nstitution and its client and accordingly, arm's length analysis using CUP is not possible. Also,that there was an error in concluding that there has been shifting of profits outside India. Incorrect relianceon Thin Capitalization rules.

HELD:There cannot be a transaction, between independent enterprises, of interest-free debt funding of anoverseas SPV by its sponsorer. Even if such a transaction between independent enterprises is at allhypothetically possible, arm's length interest on such funding will be 'nil'. Impugned ALP adjustment was tobe deleted. Assessee got relief accordingly

VBA comments:

In this order it was held that the transaction of interest-free debt funding of an overseas SPV by itssponsorer between the independent enterprises cannot happen. If there has to be an arm's lengthconsideration under the CUP method for such transaction, other than interest, it has to be neteffective gains- direct and indirect, attributable to the risks assumed by the sponsorer of the SPV, tothe SPV in question.

There cannot be a transaction, between independent enterprises, ofinterest-free debt funding of an overseas SPV by its sponsorer; if such a

transaction between independent enterprises is at all hypotheticallypossible, arm's length interest on such funding will be 'nil' [Bennett

Coleman & Co. Ltd. V. Deputy Commissioner of Income-tax [2021] 129taxmann.com 398 (Mumbai - Trib.) [30-08-2021]

TIML India (hereinafter referred to as assessee) entered into an agreement with SMG-UK for purchase ofVirgin Radio through its SPV TIML Golden-UK. TIML-India was specifically required to provide comfort tothe seller group since TIML-Golden was a newly set up entity for the purpose of acquisition of VirginRadio.When the agreement to sell for sale of Virgin Radio was concluded, one of the clauses in the saidagreement, inter alia, provided that 'In consideration of the seller entering into this agreement (theTIML-India), as primary obligor and not merely as surety, unconditionally and irrevocably guarantees tothe seller the proper and punctual performance of the purchaser's obligations under this agreement andthe transaction documents, including, without limitation, due and punctual payment of any sum whichthe purchaser is liable to pay'. The Transfer Pricing Officer treated this clause as a performance guarantee issued by the assessee infavour of the TIML-Global for payment of purchase consideration for Virgin Radio.The TPO proceeded to apply the CUP method for the determination of arm's length price of thisguarantee, and adopted 3 per cent as its arm's length price. Aggrieved, assessee raised the objectionsbefore the Dispute Resolution Panel, but without any success.

Whether when assessee already had an obligation to finance transaction of acquisition of targetcompany by SPVs, same obligation being reiterated did not amount to a performance guarantee by SPVand if such a commitment was reiterated for performance of own obligations, reiteration of this owncommitment could not have an arm's length price?Whether since assessee-company was de facto beneficiary of the transaction, assessee-company couldnot be treated as a guarantor but rather as a primary obligor for its own transaction undertaken throughSPV?Whether impugned ALP adjustment, on CUP basis, was devoid of any legally sustainable basis?

FACT OF THE CASE:1.

2.

3.

4.

ISSUE:

OBSERVED:SPVs in question came into existence due to the decision to purchase, taken by the assessee-company, andto execute the said decision at the operational level. Thus, the entire transaction of acquiring Virgin Radioswas in furtherance of the business interests of the assessee-company, finalized by the assessee muchbefore even the AE in question came into existence, and the assessee-company was de facto beneficiary ofthis transaction. Under these circumstances, the assessee-company cannot be treated as a guarantor butrather as a primary obligor for its own transaction undertaken through the SPV.

VBA comments:

Performance Guarantee cannot be given by the primary obligor and thus the obligation of acompany to pay a certain amount when it is the de-facto beneficiary of the transaction cannot beconsidered as a performance guarantee.

HELD:It was held that when assessee already had an obligation to finance transaction of acquisition of targetcompany by SPVs, same obligation being reiterated, in different words, did not amount to a performanceguarantee by SPV and if such a commitment was reiterated for performance of own obligations, reiterationof this own commitment could not have an arm's length price. Since assessee-company was de factobeneficiary of the transaction, assessee-company could not be treated as a guarantor but rather as aprimary obligor for its own transaction undertaken through SPV. Thus, impugned ALP adjustment, on CUPbasis, was devoid of any legally sustainable basis.

NOTIFICATIONS

1.The Central Board of Direct Taxes (CBDT) has extended the validity of provisions of Rule 10TD (1) & Rule10(2A) till Assessment Year 2021-22. [Notification No. 117/2021/F. No. 370142/44/2021-TPL] i.Rule 10TD prescribes list of eligible international transactions where transfer price declared by the assessee shall be required to be accepted by the Income-tax Authorities. ii.In exercise of the powers conferred by sub-section (2) of section 92CB read with section 295 of the Income-tax Act, 1961, the Central Board of Direct Taxes has made the following amendment: iii.In the Income-tax Rules, 1962, in rule 10TD, in sub-rule (3B), for the words and figures “Assessment year 2020-21”, the words and figures “assessment years 2020-21 and 2021-22” shall be substituted. This is deemed to have come into force from 1st April 2020.

2.Foreign Exchange Management (Export of Goods and Services) (Amendment) Regulations, 2021 [F. No. FEMA23(R)/(5)/2021-RB] i.Regulation 15 Foreign Exchange Management (Export of Goods & Services) Regulations, 2015 relates to the Advance payment against the exports, wherein, an exporter receives advance payment (irrespective of interest) from either a buyer or a third party named in the export declaration made by the exporter. ii.According to Regulation 15(1)(ii), exporter is mandated to ensure that the Rate of Interest to be decided is not more than the London Inter-Bank Offered Rate (“LIBOR”) +100 basis points. iii.RBI has announced the following amendments to the regulation: iv.Regulation 15, in sub-regulation 1, for clause (ii), the following is to be substituted, namely: v.“ii) the rate of interest, if any, payable on the advance payment shall not exceed 100 basis points above the London Inter-Bank Offered Rate (LIBOR) or other applicable benchmark as may be directed by the Reserve Bank, as the case may be.

3.Income-Tax (Twenty-Ninth Amendment) Rules, 2021 - Insertion Of Rule 12F [Notification No. 109/2021/F.No.370142/27/2021-TPL (Part I)] i.The Central Board of Direct Taxes has made the following rules to further amend Income-tax Rules, 1962. ii.In the Income Tax Rules, 1962, Rule 12F is to be inserted after rule 12E. iii.12F. Prescribed income-tax authority under second proviso to clause (i) of sub-section (1) of section 142. The prescribed income-tax authority under second proviso to clause (i) of sub-section (1) of section 142shall be an income-tax authority not below the rank of Income-tax Officer who has been authorized by the Central Board of Direct Taxes to act as such authority for the purposes of that clause.

4.Income-Tax (Thirtieth Amendment) Rules, 2021 - Amendment In Rule 10TD

[Notification No. 117/2021/F. No. 370142/44/2021-Tpl]

i.The Central Board of Direct Taxes (CBDT) has extended the validity of provisions of Rule 10TD (1) & Rule 10(2A) till Assessment Year 2021-22. Rule 10TD prescribes list of eligible international transactions where transfer price declared by the assessee shall be required to be accepted by the Income-tax Authorities. ii.In exercise of the powers conferred by sub-section (2) of section 92CB read with section 295 of the Income-tax Act, 1961, the Central Board of Direct Taxes has made the following amendment: In the Income-tax Rules, 1962, in rule 10TD, in sub-rule (3B), for the words and figures “Assessment year 2020-21”, the words and figures “assessment years 2020-21 and 2021-22” shall be substituted. iii.This is deemed to have come into force from 1st April 2020.

CIRCULARS

ORDERS

1.Extension of Time Lines for Filing of Income Tax Returns and Various Reports of Audit for Assessment Year

2021-22 [Circular No. 1712021 [F. No. 225/49/2021/ITA-II]

i.Extension of timelines for filing Income-tax returns and various reports of audit:

ii.Due date of furnishing Report from an Accountant by persons entering into international transaction or

specified domestic transaction under S 92E is further extended to 31st January 2022.

1.Section 119 of The Income-Tax Act, 1961 - instructions to subordinate authorities - order under section 119providing exclusion to section 144B - cases in which limitation period expires on 30-9-2021[CBDT ORDER F. NO. 187/3/2020-ITA-I, DATED 22-9-2021]The CBDT has notified two more situations where the assessment is not to be done under the facelessassessment regime. Assessment for following cases shall be completed by jurisdictional AO if the time limit for completionexpires on 30-9-21.-where afresh assessment is to be made due to assessment order being set-aside or-assessment is to be done under section 147 However, such assessment shall be pending with jurisdictional AO as on 11-09-21 or thereafter.