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YEAR END SPECIAL - 2014!
1
Newsmakers of 2014 in Tax – By Taxsutra Editorial
1. Chief Justice of Bombay High Court - Mr. Mohit Shah:
His Vodafone judgment on share valuation issue, is among the
most important rulings delivered in the last decade and stands
respectably alongside cult ones like Azadi Bachao Andolan
(Mauritius treaty) & Vodafone (Supreme Court). The pressure
on the Chief Justice would have been as much as the earlier
Vodafone case in Supreme Court, since the issue concerned
over 25 MNCs with billions of dollars in revenue at stake. He
handled the case with aplomb, was poker faced through out
and did not lose his calm even once.. Anyone who was in the
Courtroom would have come out thoroughly impressed by the
demeanour of Chief Justice Mohit Shah and his handling of this sensitive case.
Sidenote: When was the last time the Government/IRS decided to accept an
adverse High Court judgment with such massive revenue repercussions? Speaks
volumes about the quality of judgment!
2. Arun Jaitley (Finance Minister, India):
For one simple reason - the fate of GST is in his hands and he
is leaving no stone unturned - cajoling, persuading, bullying the
States into accepting the GST framework.. this is arguably one
of the biggest tax reforms in 67 years of independent India ... its
success/failure will lay on the shoulders of the Finance Minister..
3. Harish Salve (Sr. Advocate and Former Solicitor
General):
The lawyer every big corporate wants to hire whenever they are
hit by a billion dollar tax demand.. arguably the best lawyer in
India and what sets him apart from the rest is his stunning grasp
of even the most complicated tax issue.. well one could call it -
superhuman! His arguments in the Vodafone & Shell share
valuation case were forceful, relentless and hit the IRS where it
hurts the most, when he mocked them for seeking to re-write the very fundamentals
of taxation!
YEAR END SPECIAL - 2014!
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4. Arvind Datar (Sr. Advocate):
He was a part of arguably one of the most important cases of
2014, wherein the Constitution Bench of Supreme Court
struck down the National Tax Tribunal. The reason - they
accepted the brilliant, nuanced arguments of Arvind Datar
that the National Tax Tribunal which sought to usurp the
powers of High Court, was violative of the 'basic structure'
doctrine laid down in the historic case of Kesavananda
Bharati. The judgment will not only have huge repercussions
on Govt's plans to reduce disputes through creation of an alternative tax tribunal but
has also stopped in its track, 'Tribunalization of Justice', as Datar termed it in the
Courtroom.
5. Justice S.C. Dharmadhikari (Judge, Bombay High
Court):
His spate of rulings, lambasting the Revenue for frivolous
appeals on settled issues and imposing costs for wasting
Court's 'precious' time, have surely been heard with long ears
by the tax department. Justice Dharmadhikari has been
unsparing in his criticism, invoking public interest and
observing rightly that this Court also deals with issues
concerning the 'life and liberty' of citizens. Heading the tax bench based in the
financial capital of the country, that contributes over 40% of direct tax revenues of
the exchequer, is a challenge in itself. Justice Dharmadhikari's 'no nonsense'
approach is refreshing and welcome.
6. Justice S. Ravindra Bhat (Judge, Delhi High Court):
Justice Bhat delivered several significant tax judgments
during the course of 2014, three of which have made it to
Taxsutra's Top 20 Judgments of the year - Copal Research
(Indirect transfers & 50% threshold for the term
'substantially'), Centrica Offshore (Employee secondment)
and Radials International (PMS income classification). In all these cases, there is a
common thread.. Justice Bhat hasn't shied away from laying down the law wherever
YEAR END SPECIAL - 2014!
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there was an ambiguity/grey zone and has infact done with so with well reasoned
judgments, citing OECD commentaries and UN Reports, thereby giving us a different
flavour.
7. Dr. Parthasarathi Shome (Chairman, Tax Administration Reforms
Commission):
His current designation is not why he makes it to this list,
but it his immense contribution to development of tax policy
in India, that deserves a special mention. As Advisor to
former Finance Minister Mr. P. Chidambaram in the UPA
regime, he championed the cause of progressive tax policy,
non-adversarial regime and a tax administration that
fundamentally changes its mindset and treats the taxpayers
as a 'customer.' Some of these words are now slowly
finding their way into the CBDT lexicon.. He has delivered
some important reports over the last several months on Tax Administration Reforms.
Some of the recommendations are revolutionary but the jury is still out on whether
Govt. will bite the bullet!
8. CBDT:
But for them, we probably wouldn't have too much work. Over the last 12 months,
the tax department has faced scorched earth criticism for what the then Opposition
party and now ruling party, BJP termed 'tax
terrorism.' The CBDT has had to therefore make big
adjustments in their attitude towards the taxpayer
and to their credit, they have, by bringing out
circulars and clarifications to reduce litigations and
imploring the tax officers to shed their
'confrontationist' approach. The CBDT plays a
crucial role in tax policy development as well as
administration and taxpayers would be hoping that the new Chairman Ms. Anita
Kapur would take a break from precedent and showcase a new, more taxpayer
friendly side of the Board.
YEAR END SPECIAL - 2014!
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9. Foreign Tax Division:
The troika of Competent Authority Akhilesh Ranjan, Joint
Secretary Rajat Bansal and APA Commissioner Kamlesh
Varshney have worked beautifully as a team, knitting together a
cohesive approach towards taxation of MNCs. While Akhilesh
Ranjan has smoothened the rough edges in the relationship with
USA's IRS and stamped India's imprint on OECD's BEPS project,
Rajat Bansal's round the clock efforts led to India recently signing
its first Bilateral APA with Japan. APA Commissioner Kamlesh
Varshney, in the last 2 years of APA regime, has succeeded in
creating an atmosphere of trust, thus resulting in a record number
of APA applications. These three gentlemen and their respective
teams surely deserve a special recognition for being the faces of India's international
tax policy.
10. IFA India:
If there was any proof needed of the important role India
now plays with regards to development of international tax
jurisprudence, one ought to have been only present at the
IFA Mumbai Congress to witness the spectacle! The
Mecca of all tax conferences, IFA India played hosts to
over 1500 international delegates, dished out the famous
Indian hospitality and confidently put its foot forward as one of the
thought leaders when it comes to tax policy. The India Chapter is now
one of the biggest, most vibrant branches of IFA worldwide and hence
this special mention. This mention would however be incomplete
without recognizing the person who has led this charge - IFA
President Porus Kaka (Sr. Advocate), who is the first Asian to occupy
this prestigious office.
YEAR END SPECIAL - 2014!
5
Top 20 Tax rulings of 2014
These are the rulings picked by Taxsutra’s Editorial Team for the third edition of the
book - ‘Top 100 Income-tax rulings of 2014’, being published by CCH.
1. Supreme Court : Lays down law on retrospective taxation, principle of
"fairness" the balancing factor
Vatika Township Private Limited [TS-573-
SC-2014]
2. Supreme Court : Strikes down National Tax
Tribunal as violative of ‘basic structure’
doctrine
Madras Bar Association [TS-600-SC-2014]
3. Supreme Court : Explains religious/charitable purpose duality; Gives
guidelines on "substantial question of law"
Dawoodi Bohara Jamat [TS-148-SC-2014]
4. Delhi HC : Word "substantially" for indirect transfers given 'restrictive'
meaning; Sets 50% assets threshold
Copal Research Limited [TS-509-HC-2014(DEL)]
5. Delhi HC : Upholds AAR ruling on employee secondment creating PE; FTS
also applicable
Centrica India Offshore Pvt. Ltd. [TS-237-HC-2014(DEL)]
6. Gujarat HC : Directs CBDT to extend returns filing due date
All Gujarat Federation Of Tax Consultants [TS-601-HC-2014(GUJ)]
YEAR END SPECIAL - 2014!
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7. Bombay HC : Share issue transactions outside TP
net; Chapter-X invocation only where income arises
Vodafone India Services Pvt. Ltd. [TS-308-HC-
2014(BOM)-TP]
8. Karnataka HC : Questions DTAA coverage to domestic law amendment;
"Sovereign power" to break treaties
Vodafone South Limited [TS-173-HC-2014(KAR)]
9. Delhi HC : Lays down tests / principles to determine
characterization of share transactions under
discretionary PMS
Radials International [TS-238-HC-2014(DEL)]
10. Karnataka HC : Deduction claim unaffected by 'window dressing' of balance
sheet to satisfy shareholders
Karnataka Soaps and Detergents Ltd [TS-765-HC-2014(KAR)]
11. Bombay HC : Reads Rajdharma to Revenue for wasting 'precious' court time;
Public interest paramount
Larsen and Toubro Ltd [TS-441-HC-2014(BOM)]
12. Karnataka HC : Sim card distribution = sale of 'right to service', Sec 194H
Commission TDS inapplicable
Bharti Airtel Limited & Ors [TS-722-HC-2014(KAR)]
13. Delhi ITAT : Admits employees' LinkedIn profiles as
additional "evidence" for PE determination
GE Energy Parts Inc. [TS-400-ITAT-2014(DEL)]
YEAR END SPECIAL - 2014!
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14. Delhi ITAT : Corporate guarantee not 'international transaction' absent
bearing on profits; Interprets Sec 92B
Bharti Airtel Limited [TS-76-ITAT-2014(DEL)-TP]
15. Mumbai ITAT : SB lays down law on BPO-KPO & abnormal high profit margin
comparable
Maersk Global Centres (India) P. Ltd. [TS-74-ITAT-2014(Mum)-TP]
16. Delhi ITAT : Nortel US mere "shadow" company; Indian arm constitutes PE,
attributes 50% profit
Nortel Networks India International Inc. [TS-355-ITAT-2014(DEL)]
17. Mumbai ITAT : Disproportionate / non-uniform allotment under rights issue
can attract rigours of Sec. 56(2)(vii)(c)
Sudhir Menon HUF [TS-146-ITAT-2014(Mum)]
18. Mumbai ITAT : Raises alarm over CA's reckless advice, calls
ICAI to stem "deteriorating standards"
Vijay V Meghani [TS-548-ITAT-2014(Mum)]
19. Mumbai ITAT : Emphatic Revenue victory in Vodafone TP call options case;
Tribunal pierces 'Corporate Veil
Vodafone India Services Private Ltd. [TS-422-ITAT-2014(Mum)-TP]
20. Sessions Court : Favorable ITAT order no saviour for
Jayalalitha in corruption case
State vs. J. Jayalalitha & Others
YEAR END SPECIAL - 2014!
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Top judgments of 2014 picked by Experts
Each of the experts has picked their Top 5 rulings of the year for the 3rd edition of
Taxsutra’s book – Top 100 Income-tax Rulings of 2014, being published by CCH.
Mr. Dinesh Kanabar (CEO , Dhruva Tax Advisors) on
Supreme Court ruling in Madras Bar Association v. Union of
India –
“The striking down of the proposed National Tax Tribunal by a
Constitution bench of the Supreme Court is without doubt one of the
most far reaching decisions in recent times. In arriving at this conclusion, the Court
referred to the basic structure doctrine expounded in the landmark Kesavananda
Bharati case and held that when judicial powers are sought to be transferred to
newly created tribunals, Parliament must ensure that such tribunals must confirm to
the salient characteristics and standards of the Courts.
Not only does this judgment have immediate ramifications in terms of the setting up
of the National Tax Tribunal, the various observations and findings of the Court will
have a significant bearing on the formation and operations of tribunals generally. If
implemented, they will also help ensure that such dispute resolution mechanisms
remain independent and highly effective.”
Mr.Ketan Dalal (Managing Partner (West) and Sr. Partner,
Tax & Regulatory Services, PwC India) on Delhi Tribunal ruling in
GE Energy Parts Inc. v. ADIT –
“In this case, the LinkedIn profile of employees filed by the revenue
was admitted as additional evidence, and the assessee’s argument
that LinkedIn profiles being self appraisal of employees should not be considered
was overruled. The issue before the Tribunal was whether there is a permanent
establishment existence based on factual finding, and that is the context in which the
LinkedIn profile of the employees was considered as relevant for the purpose of
determining the existence of the PE.
While these decisions will certainly be agitated further, it drives home the importance
of social media and that communication through social media is nowadays taken
cognizance of by judicial authorities and considered as evidence.”
YEAR END SPECIAL - 2014!
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Mr. Mukesh Butani (Managing Partner , BMR Legal) on
Delhi High Court ruling in Radials International vs
Assistant Commissioner of Income-tax -
“Whether income from PMS scheme has to be characterized as
business income or capital gains has been a bone of contention for
several investors and PMS service providers from the point of view of withholding tax
obligation. The HC has laid down broad principles that ease the task of such an
exercise. Whilst doing so, it has highlighted important principles on Assessee’s intent
being inferred holistically, the fact that that such intent cannot be judged at the time
of deposit. It also highlighted that the number of transactions and period of holding
cannot be a determinative test for characterization, a principle laid down in the CBDT
circular and followed by several tribunals. Taking note of the PMS agreement, it held
that the intent to make profit from such investment cannot be the sole guiding factor.
It relied on SC ruling in the case of Motors & General stores that highlighted that the
agreement is not conclusive and Courts are expected to assess its true impact. The
Delhi HC affords another opportunity to put the controversy at rest by clarifying the
law and lend clarity to the vexed issue.”
Mr . Gautam Doshi (Reliance Anil Dhirubhai Ambani
Group ) on Supreme Court ruling in CIT vs. Vatika Township
Pvt. Ltd. -
“Legislative drafting is a fine art. A good piece of legislation
normally, survives the passage of time. The same words do take
different colours in changing times and thereby achieve the intention of the
legislature. But, sometimes it may be found that the language has failed to capture
certain nuances - either because the situation giving rise to those nuances did not
exist or was not envisaged or merely because the language fails to carry the
intended meaning. In such cases, it is an accepted position that the Legislature can
clarify, explain or declare what the law always intended. Such amendments can be
and often are expressly, stated to be retrospective. But, even if it is not so stated,
such amendments can have retrospective effect.
YEAR END SPECIAL - 2014!
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Retrospective amendments expressly so stated or implied by their nature are
growing in number. At this stage, the decision of the five judge bench of the
Supreme Court comes as a path breaker which lays down all that one wants to know
on the principles governing implied retrospectivity – the normal presumption against
retrospectivity, the circumstances in which implied retrospecitivity is presumed, is
justified, is accepted and the reasons for the normal presumption and the means for
rebutting the presumption.
The fine analysis accompanying the application of the theoretical basis for and
against restrospectivity to the proviso to Sec 113 very vividly illustrates the principles
enumerated by the Hon’ble Court. The provision in question is not one of universal
application – it applies only in the cases of block assessments but, the analysis of
whether the law always provided for a levy of surcharge or whether the levy of
surcharge was an amendment, a modification is an academic delight.
The principles behind the presumption against implied retrospectivity so clearly set
out in the decision will also make a difference when (not, if) the Supreme Court is
called upon to examine the validity of express retrospective provisions. One hopes
for an equally, balanced approach by the Supreme Court at that time.”
Mr. T.P. Ostwal, (TP Ostwal and Associates) on Bombay
High Court ruling in Vodafone India Services Pvt. Ltd. vs.
UOI & Ors -
“The recent ruling of the Bombay High Court in case of the Indian
subsidiary of Vodafone Group Plc involving transfer pricing dispute
related to share capital infusion transaction, is a significant judgment. The High
Court’s decision that the transfer pricing provisions should not apply to share capital
infusion transaction is very encouraging and should have persuasive impact on the
tax disputes faced by other Indian taxpayers in respect of similar transactions.
The transfer pricing provisions should not be applicable on transactions which are in
the nature of capital receipt and don’t have a bearing on the taxable of the hands of
the taxpayer. A transaction having a bearing on the profits, income, losses or assets
is an important pre-condition for attracting the application of the transfer pricing
provisions. Since transaction involving issuance of additional shares on account of
capital infusion by a foreign shareholder in the Indian subsidiary does not have any
bearing on the income of the Indian subsidiary, the same should not be subject to
the transfer pricing provisions, as the entire exercise of determination of the arm’s
length price in such case would be an academic exercise only.
YEAR END SPECIAL - 2014!
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The on-going transfer pricing litigation on share issue transaction has been a drain
on India's reputation and has been a dampener on the foreign direct investment into
the country in last few years. With this decision of the Bombay high court, it is likely
expectation that the on-going controversy around the share issue transaction will get
settled and hopefully, the Revenue will not take the dispute further to the Supreme
Court and let the High Court decision prevail. This would have a positive impact on
the overall tax environment in India and should encourage Multinationals to infuse
additional equity in the Indian subsidiaries for on-going business expansion plans
without any hassle.”
Mr. Ajay Vohra, Senior Advocate on Delhi High Court ruling in DIT vs. Copal
Research Ltd. and Ors.-
“The Delhi High Court in the aforesaid case, dismissed the writ
petitions filed by the tax authorities against the ruling of the Authority
for Advance Rulings (AAR), wherein it was held that the capital gains
arising on sale of shares of an Indian company by a Mauritius
company (Direct Transfer), and on the sale of shares of a US
company (which in turn held shares of an Indian company) by another Mauritian
company (Indirect Transfer), shall not be chargeable to tax in India in accordance
with the provisions of Article 13(4) of the India -Mauritius Tax Treaty.
The decision has been welcomed by foreign investors and is likely to bring much
needed clarity as regards the Treaty entitlement in respect of capital gains to a
Mauritian investor.
This decision reaffirms the principles articulated by the Supreme Court in the case of
Vodafone BV on legitimacy of corporate holding company structures. The High Court
has unequivocally held that a company cannot be disregarded as a mere sham
merely on the ground of being an intermediate or holding entity.”
Mr. Sunil Kapadia , (Senior Partner, E&Y) on Delhi High Court ruling in
Centrica India Offshore Pvt Ltd vs Commissioner of
Income-tax - I & ORS -
“Secondment of employees by foreign companies to Indian affiliates
is a common practice amongst multinational groups. Such
arrangements have been under the constant scrutiny of the tax
authority in India and have been the subject matter of controversy/litigation in the
absence of specific provisions in the Indian Tax Laws (‘ITL’). Various judicial
YEAR END SPECIAL - 2014!
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precedents have looked at diverse factors to determine who is the “real” employer or
“economic” employer of the seconded employees. The concept of “economic
employer”, other than the “legal employer”, is also acknowledged in various
international commentaries/rulings. It also assumes significance for determining tax
liability of such employees in the host jurisdiction. In certain cases, where the Indian
entity (which receives the seconded employees) is seen as the economic employer,
presence of such employees has been held to be not triggering Permanent
Establishment (‘PE’) exposure or service arrangement for the overseas legal entity
seconding employees. Under such circumstances, a payment by the Indian entity to
the overseas entity through whom salary is disbursed is accepted to be a non-
chargeable payment in the nature of reimbursement of salary costs. As against that,
a contract of service through employees triggers tax liability, including transfer
pricing and tax withholding obligation for the parties.This unfavourable ruling of the
Delhi High Court (‘HC’) follows a different approach by considering the legal
employment relationship, right to termination contract and right of employees to
enforce payment of salary as crucial factors to determine the ‘employer’ of the
assignees. Multinationals may need to critically consider and evaluate impact of this
ruling on their existing/proposed secondments.”
K.R. Sekar (Partner & Co-Lead Global Business Tax- Deloitte
Haskins&Sells ) on Mumbai Tribunal ruling in Sudhir Menon HUF vs
Assistant Commissioner of Income-tax -
“The conclusion by Mumbai Tribunal on the application of Section
56(2)(vii) (c ) on the issuance of rights issue has a far reaching
implications. The Mumbai Tribunal observed that Tribunal is not competent to read
down the provision of Section 56(2) (vii) to conclude that this provision applies only
for transfer and not for allotment creates an interesting debate on the powers and
approach of Tribunal. Ignoring the rationale behind the introduction of section
56(2)(vii) which is self- contained Anti-Avoidance Regulations by itself, the moot
point arises is whether the approach of Tribunal is correct. In my humble view it is in-
correct. Though Tribunal made a passing remark that Bonus issue stands on a
different footing from right issue, yet the conclusion by Tribunal may lead to
significant tax debate on the power/approach to be adopted by Tribunal in
interpreting law. The conclusion of Mumbai Tribunal on the definition of Income in
the context of Anti-Avoidance Regulation is contrary to views expressed by Bombay
High Court in Vodafone, though the HC ruling came later. This ruling indicates how
the judicial thinking can be divergent on important principles thus leading to
“avoidable legal disputes”.”
YEAR END SPECIAL - 2014!
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Cases to watch out for in 2015
(Excerpts from the book Top 100 Income-Tax Rulings of 2014, being published by
CCH)
1. Kalanithi Maran & Ors (Supreme Court)
A bench headed by then Chief Justice of India – R.M. Lodha, was quick to stay the
Madras HC judgment, that had literally shut the door on writ petitions against re-
assessment orders. Madras HC had ruled that where hierarchy of
remedy of appeals are provided in a fiscal statute, party has to
exhaust them instead of seeking relief by invoking writ jurisdiction
of Court, which according to the Court, was 'discretionary' and
'extraordinary'. The Court further observed that in writ petition,
Court is concerned with decision making process adopted by an
authority, rather than decision itself. Differentiating between
'jurisdictional' fact and 'adjudicating' fact, HC had held that where
an adjudicatory process was involved on merits, then only remedy open to an
assessee was to go through procedure provided under the enactment. HC further
had rejected assessees' strong reliance on SC ruling in Calcutta Discount and
observed that factual position prevailing then, no longer existed. The fact that Sr.
Advocate Harish Salve appeared for the assessees in Supreme Court, is a good
indicator of how important this case is.
2. IBM (Supreme Court)
Not many cases get an early hearing. This is one of those
few and for good reason – the issue of taxability of packaged
software payments has a significant impact on the software
industry. The Karnataka HC ruled that consideration paid by
the assessee to a foreign supplier for transfer of right to use
the software or computer program, was taxable as royalty u/s
9(1)(vi) of the Income tax Act. Harish Salve once again,
leading the charge on behalf of the assessees!
3. Cannon India (Delhi HC)
Let there be no doubt whatsoever that whichever
way the Delhi HC rules in the marketing intangibles
case, it will make it to our Top 20 rulings next year!
The marathon hearings in High Court were
YEAR END SPECIAL - 2014!
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concluded in November 2014, with an array of top lawyers appearing for taxpayers,
arguing that the ITAT Special Bench decision in LG must be set aside. The issue of
marketing intangibles, i.e. Advertising, Marketing & Promotion (AMP) has fast
become one of the most litigated Transfer Pricing issues in India, but be rest assured
that other jurisdictions too will be closely following the HC verdict, which is expected
early in the new year!
4. Expro Gulf Ltd. (Uttarakhand HC)
This could turn out to be one of those sleeper of a case, and Uttarakhand HC has
seen quite a few of them in the last couple
of years (remember the case challenging
the constitutional validity of DRP?). The
CBDT’s notification (Nov. 2013) declaring
Cyprus as a non-cooperative jurisdiction,
has been challenged vide a writ petition,
with the petitioner arguing that the said notification supersedes the India-Cyprus
DTAA and hence ought to be struck down, since the DTAA ought to prevail over
domestic law. The notification has serious consequences on availing deduction with
regard to transactions with Cyprus parties, transfer pricing implications and a higher
TDS rate on payments to Cyprus entities.
5. Poompuhar Shipping Corporation (Supreme Court)
The judgment delivered by Madras HC in this case, made it to our Top 20 Rulings of
2013. Hence but natural that the Apex Court admitting the assessee’s SLP should
find a prominent mention in this space. HC had ruled that income from time
chartering or use of ships constitutes equipment royalty u/s 9(1)(vi)(b). It also held
that ship constitutes ‘equipment’ and that meaning of equipment under royalty
definition should be construed widely.
YEAR END SPECIAL - 2014!
15
Most Viewed Tax Judgments of 2014
1. Centrica India Offshore Pvt. Ltd. [TS-237-HC-2014(DEL)]
2. Copal Research Limited [TS-509-HC-2014(DEL)]
3. JC Bamford Excavators Limited [TS-161-ITAT-2014(DEL)]
4. Coca Cola India Private Limited [TS-547-HC-2014(BOM)]
5. R & B Falcon Offshore Ltd. [TS-233-HC-2014(UTT)]
6. Nortel Networks India International Inc. [TS-355-ITAT-2014(DEL)]
7. E Funds IT Solution [TS-63-HC-2014(DEL)]
8. POSCO Engineering & Construction Company Limited [TS-108-ITAT-
2014(DEL)]
9. Steria (India) Limited [TS-285-AAR-2014]
10. Viacom 18 Media Private Limited [TS-179-ITAT-2014(Mum)]
YEAR END SPECIAL - 2014!
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Most Viewed Expert Columns of 2014
1. Analysis of section 35AD changes
Decoding Finance Bill, 2014, Milind Kothari (Managing Partner,
BDO INDIA LLP) analysed the changes relating to Section 35AD,
which provides for deduction in computing taxable income in
respect of capital expenditure (other than expenditure on
acquisition of land or goodwill or financial instrument) incurred for
the purposes of specified business prior to commencement of
operations of such business. The author wrote how the
amendment would have positive and negative affects. He
concluded by writing, “While the deduction is well-intended to grant deduction in
respect of investment in specified businesses, it remains to be seen that needless
controversies are not created while administering the benefit under this section
which has been the bugbear of many such provisions under the Act.”
2. Sec 14A disallowance when there is no exempt income – An unsettled
controversy
Rohit Garg (Senior Associate, Vaish Associate, Advocates) in
his article discussed the issue that whether Section 14A
disallowance can be made in the year when no exempt income has
been earned or received by assessee. Noting that various High
Courts had given relief to the taxpayer on this issue despite the
adverse Special Bench decision in Cheminvest, the author wrote, “It
would now be interesting to see what view would other High Court
(s) take, especially Delhi High Court where the assessee’s appeal is
pending in the case of Cheminvest Ltd (surpa).”
3. CBDT's benevolent circular on TDS on service tax - Putting controversy at
rest?
K R Girish, Partner and Dinesh Daga, Senior Manager of BSR
& Co LLP, in their article, traced the background and judicial
developments necessitating issuance of Circular 1/2014 that
relaxed withholding on service tax component on payments to
residents. On the question of when the Circular comes into
effect, they believe “In the absence of any effective date
mentioned in Circular, the said Circular ought to be effective with
YEAR END SPECIAL - 2014!
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immediate effect.”
4. The long and short of it – Period of holding for capital gains
While decoding Finance Bill, 2014 which proposed an increase in the
period of holding for capital gains on transfer of certain securities to
be ‘long-term’ from 12 months to 36 months, Tejas Desai (Partner,
EY) and Shonna Mascarenhas (Manager, EY) talked about the amendment and its
effects. They wrote, “The proposed change in the holding period of unlisted debt
units coupled with removal of the concessional rate of 10%, is likely to put a strain on
the asset management industry.”
5. Corporate Social Responsibility (CSR) Deduction - a
critique
The Finance (No 2) Bill, 2014 brought about a far-reaching
amendment as far as Corporate Social Responsibility (‘CSR’)
expenditures by corporates are concerned. While the newly
enacted Companies Act, 2013 mandates corporates to incur
the said expenditure, the Bill proposes that CSR expenditure
shall not be deductible u/s 37 of Income Tax Act. Giving a
critique on CSR expenditure deduction non-allowability u/s 37, Nihar Jambusaria
(Sr. Vice President-Taxation, Reliance Industries Ltd) wrote, “The proposed
amendment in the Bill does not provide a level playing field for all kinds of CSR
expenditure. If CSR is not treated as an allowable expenditure, Companies would be
inclined to give funds only to those organisations where they get maximum tax
benefit.”
YEAR END SPECIAL - 2014!
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Most Viewed Tax Ring of 2014
5 ideas for new FM to end "tax terrorism"
Ruling party BJP's election manifesto promised a slew of radical changes to both tax
policy and approach to tax disputes. BJP accused the UPA govt. of unleashing 'tax
terrorism' and 'uncertainty', thereby creating anxiety amongst the business class and
negatively impacting the investment climate. It also called for a 'non-adversarial',
'conducive' tax environment and a tax policy roadmap, that would include a simplified
tax regime and an 'overhaul' of the dispute resolution
mechanism.
So what are the immediate steps that the new Finance Minister
Arun Jaitley needs to take, so as to put an end to 'tax terrorism'
and bring back foreign investors?
Tax experts Mr. Mohan Parasaran (Senior Advocate & Former Solicitor General of
India), Mr. Girish Dave (Former Chief Commissioner of Income Tax), Mr. Rupak
Saha, (GE India), Mr. Nihar Jambusaria (Reliance Industries Ltd.) Ms. S.
Gayathri (Essar Energy Business), Mr.Krishan Malhotra (Amarchand & Mangaldas
& Suresh a. Shroff & Co.), Mr. Uday Ved(Chartered
Accountant) Mr. K.R. Sekar (Deloitte Haskins & Sells), Mr. Mukesh Butani (BMR
Legal) and Mr. Sunil Kapadia (EY LLP) shared their views.
Click here to read what the above experts stated.
YEAR END SPECIAL - 2014!
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3 Significant Transfer Pricing Moments of 2014
2014 will be remembered as a year dotted with some significant developments from
a transfer pricing standpoint. Whether it was signing of the first bilateral APA with
Japan or landmark Bombay HC verdict on Vodafone / Shell's share issue transaction
or OECD's BEPS initiatives, this year has seen some major evolution in the Indian as
well as global transfer pricing landscape.
As we say goodbye to 2014, top tax professionals talk about the significant moments
in their opinion, on developments relating to transfer pricing during 2014. Excerpts
from Taxsutra’s Tax Ring :
Rahul Mitra (Chartered Accountant)
“The year of 2014 was a milestone in transfer pricing (TP),
both in the global and Indian landscapes. From the global
standpoint, OECD issued a number of position papers and
discussion drafts on TP under the BEPS initiative, which aim
at creating a more transparent regime of reporting by MNCs of
their global supply chain; and also re-enforcing the concept of
substance in the context of TP. The emphasis on intangibles, risks associated with
functions, etc would define the way Revenue Administrators across the world would
view TP in the coming years.”
Sudhir Nayak (Partner, International Tax, Sudit K. Parekh &
Co.)
“The year 2014 saw the Tax courts deciding on a number of
vexing transfer pricing issues like issue of equity shares,
corporate guarantee. The courts have given well reasoned
orders on these controversial issues in the case of Vodafone,
Shell and Bharati Airtel. These pronouncements would serve as guiding principles
for taxpayers while determining the applicability of transfer pricing provisions to such
transactions and also help put to rest similar controversies involving high value
transactions in the coming years.”
YEAR END SPECIAL - 2014!
20
Subhankar Sinha (VP, Head of Taxation, Siemens South
Asia)
“When we look back to the developments in the transfer pricing
arena during 2014, clearly the most pleasant surprise came from
the Finance Minister when he introduced the NDA government’s
first Budget in July this year. Introduction of range concept as
against arithmetic mean for determining arm’s length prices; use
of multiple year data up to two prior years instead of restricting the comparables’
financial data only to the year under evaluation; rollback provisions for Advance
Pricing Agreements will go a long way in simplifying our transfer pricing laws and
reducing long drawn disputes. With these measures, India has moved a step closer
to best practices that are followed by other mature jurisdictions of the world.”
Amod Khare (Partner, Transfer Pricing, BMR Advisors)
“Another big reason for cheer in 2014 was the Bombay High Court
decision on the applicability of transfer pricing provisions to issue
of shares. With the Honorable High Court ruling that transfer
pricing provisions should not be applicable to transactions that
have no element of income in them, the potential tidal wave of adjustments on non-
existent income have been kept at bay. (At least till Budget 2015!)”
Ajay Rotti (Partner, Dhruva Tax Advisors LLP)
“In the year gone by, the Government, after seeing a good
response to the Advance Pricing Agreements, introduced the
rollback mechanism. The amendment enables the taxpayer to
apply a concluded APA to international transactions in four
previous years covered in the APA. Interestingly, restricted use of
multiple year data and use of arithmetic mean have contributed the most to the
current TP litigations on benchmarking. The Indian TP provisions were aligned to
global best practices by permitting use of range and multiple year data.
APA rollback and rationalisation of TP regulations would go a long way in reducing
the transfer pricing litigations and is encouraging given that it signals the intent to
address the problem of growing tax litigation.”
YEAR END SPECIAL - 2014!
21
Rohan K Phatarphekar (Partner and National Leader -
Transfer Pricing, KPMG India)
“Another important development in the Indian TP landscape was
the decision in case of SogaShosha companies, which are
Japanese entities, engaged in general trading of diverse range
of products. The Delhi Tribunal in case of Mitsubishi Corporation
not only clearly distinguished the SogaShosha entities from other normal trading
companies but also reiterated certain important points relating to attribution of profits
in case of location savings and other routine intangibles. The Tribunal stated that in
computation of arms length profits it was not necessary to consider the entire
turnover or cost of goods as a component but comparison could be based on Berry
Ratio ( Gross Profit to Operating expenses ratio) where taxpayer did not assume
significant inventory risk or perform any value added functions. The upholding of the
use of the berry ratio augurs well not only for Soga Shosha companies but also for
commissionaire and limited risk distributor arrangements. Also, based on the OECDs
view the Tribunal ruling clarified that there was no need for allocation of additional
returns where location savings were passed on to the customers and where no non-
routine intangibles existed in the Indian company.”
Sanjay Tolia (Country Leader, Transfer Pricing Practice, Price
Waterhouse & Co LLP)
“The appointment of the Modi Government, India's successful
mission to Mars and the awarding of Nobel Peace Prize jointly to
Kailash Satyarthi and Malala Yousafzai for their struggle against
the suppression of children and young people and for the right of
all children to education would be considered as landmark moments in the history of
India. Equally so, it is going to be a memorable year for the world of Transfer Pricing!
2014 saw some significant developments within India ranging from signing of 5
unilateral APA's and 1 Bilateral APA with Japan, introduction of the range and roll-
back concepts, enabling use of multiple year data, expansion of APA team to
introduction of stringent regulations for related party disclosures under the
Companies Act and SEBI Rules.”
Click here to read the full article.
YEAR END SPECIAL - 2014!
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'Crystal Ball Gazing 2015 - Tax trends to watch out for
(Excerpts from the book Top 100 Income-Tax Rulings of 2014, being published by
CCH)
Girish Vanvari, Co-Head of Tax, KPMG in India
Promote the Ease of Doing Business in India by
providing clarity on tax laws
Considering the need to promote the ease of doing business in
India and to attract FDI into the country, one may see the government providing
clarity on the certain ambiguous provisions in the present tax laws.
One may expect clarity on the manner of taxability of offshore transactions involving
indirect transfer of assets in India by the introduction of rules in this regard. In
formulating the same one could also see many of the recommendations of the
Shome Committee finding its place in the final regulations.
Provisions such as prescribing a 50% threshold for global assets to be located in
India to determine ‘substantiality of value derived from India’, prescribing safe
harbours for portfolio investments, foreign listed companies and group restructuring
from the applicability of these provisions could be a reality.
Also the government may choose to defer the implementation of the General Anti
Avoidance Rules which are slated to come into effect from 1st April 2015 considering
the uncertainty created by its introduction in the international investor community
coupled with the perceived lack of readiness for its implementation.
Formulating a ‘Future ready’ Tax Legislation
The Modi government may choose to rethink the tax policies and
administration practices with a fresh mind and align the same
with the present economic reality rather than improvise upon an
earlier piece of draft legislation i.e. the Direct Tax Code.
Also considering the fact that many of the provisions proposed in
the DTC such as introduction of capital gains tax on indirect
transfer and general tax avoidance rules have already been incorporated in the
prevailing law, the government would do well to wait for a consensus to emerge from
the various debates / committee proposals on various issues such as Base Erosion
and Profit Shifting (‘BEPS’), Tax Administration Reform Commission (TARC)
recommendations etc before introducing a robust tax legislation that adopts the
global best practices in India. One could expect the government to announce various
measures towards formulating a ‘future ready’ tax framework.
YEAR END SPECIAL - 2014!
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Coming Soon…