From The Judiciary

Can a financial institution which is wholly owned by the Government of China (36.45% shares held by the Government of China) take benefit of the Article 11(3) of the India- China Double Taxation Avoidance Agreement (DTAA)?

Tata Teleservices Ltd TS-603-ITAT- 2024(DEL)

Facts

Tata Teleservices Ltd. (Assessee) did not deduct tax at source on interest payments made to China Development Bank (CDB) by taking benefits of Article 11(3) of the DTAA. However, tax officers opposed it and made two arguments:

Ownership Dispute: The Revenue contends that, according to the financial statements, only 36.45% of CDB's shares were held by the Ministry of Finance, China and the remaining shares held by other entities such as Central Huijin Investment Ltd., Buttonwood Investment Holding Company, and the National Council for Social Security Fund. Thus, the Revenue argued that CDB does not meet the criteria for exemption as a wholly government-owned financial institution.

Amendment Dispute: The Revenue also challenges the applicability of the amended Article 11(3) of the DTAA, effective from 17 July 2019, which specifically includes CDB in the list of institutions wholly owned by the Government of China. The Revenue argues that this amendment, which post-dates the relevant financial year (FY 2015-16 ), should not retroactively apply to the case.

Held

The Delhi Income Tax Appellate Tribunal (Delhi ITAT) concluded that the assessee is entitled to the benefits under Article 11(3) of the India-China DTAA, which exempts interest payments made to CDB from tax in India based on the following aspects:

• Protocol Clarification: The 2019 protocol to the DTAA clarified that CDB is a financial institution wholly owned by the Government of China, which aligns with the definition provided under Article 11(3) of the DTAA.
• Tax Exemption Confirmation: Interest payments made by the assessee to CDB are exempt from tax in India based on the DTAA provisions.
• Revenue’s Appeal Dismissed: The Revenue's appeal challenging the exemption of CDB was dismissed, upholding the CIT(A)'s favorable decision for the assessee..

Our Comments

The case underscores the importance of Article 11(3) of the DTAA, which exempts interest payments to government-owned financial institutions from tax. By affirming that the CBD is covered under this provision as a wholly government-owned institution, the ruling emphasizes the DTAA’s effectiveness in providing clarity and certainty in international tax matters, thereby protecting taxpayers from undue tax liabilities and disputes.

Whether payments for accessing online educational content should be considered as income from providing technical services and thus subject to tax?

Coursera Inc. TS-610-ITAT-2024(DEL)

Facts

Coursera Inc., a USA-based company operating a global online learning platform, was involved in a tax dispute with Indian authorities over the tax treatment of its receipts from Indian customers. Coursera offers access to courses and degrees from various universities and companies through its platform but does not create the content itself. Instead, it acts as an intermediary, providing access to these courses for a fee.

The Indian tax authorities contended that Coursera’s receipts should be classified as Fees for Technical Services (FTS) or Fees for Included Services (FIS) under the tax treaty between India and the US. The authorities argued that Coursera provides technical services, including user-specific services and support, which they claimed involved the transfer of technical knowledge.

Held

The Delhi Income Tax Appellate Tribunal (Delhi ITAT) ruled that Coursera is a aggregator of educational content, not a provider of technical services. Therefore, its receipts from Indian customers do not qualify as FTS or FIS under the tax treaty.

The Delhi ITAT noted that the Assessing Officer (AO) failed to properly review the agreement between Coursera Inc. and Gandhi Institute of Technology and Management, leading to an incorrect conclusion.

The services provided by Coursera did not involve the transfer of technical knowledge or skills, and thus did not meet the ‘make available’ condition under Article 12(4) of the India-USA DTAA.

The Revenue could not prove that Coursera's services involved transferring technical knowledge that would enable the recipient to use it independently and therefore, the Revenue’s appeal was dismissed.

Our Comments

This case highlights the difference between just providing a platform for services and offering technical services as defined under Article 12(4) of the India-USA DTAA.

Dismisses assessee’s miscellaneous application for rectifying earlier order with respect to interest on receivables

BA Continum India Private Limited [TS-339-ITAT-2024(HYD)-TP]

Facts of the case

The assessee filed a Miscellaneous Application (MA) for rectification/ amendment of the Tribunal’s order for AY 2018-19. The Ld Assessee Representative (AR) submitted that the direction given by the Tribunal in Para 9 of the order is required to be modified, as powers of the Transfer Pricing Officer (TPO) pursuant to the direction of the Tribunal cannot be restricted. Furthermore , it was the contention of the Ld AR that ground numbers 2(a) and 2(d) have not been adjudicated by the Tribunal.

In the case, the Dispute Resolution Panel (DRP) had decided the issue with respect to interest on receivable in Paras 2.1.17 to 2.1.21 of its order whereby the DRP has held that the SBI short-term rate as applicable for outstanding receivables beyond credit period of 30 days is to be applied. However, the Tribunal, while remanding the matter to the file of the TPO had directed to decide the issues considering the decision in the case of Zeta Interactive, Satyam Venture, and Apache Footware.

ITAT Order

The Tribunal held that it has merely remanded the issue to the file of the TPO with the direction to consider various judgments of the Tribunal and in that view, there is no error in the order passed by the Tribunal. Furthermore, the Tribunal noted that the assessee had relied upon the HC’s decision in the case of Laxman Das Bhatia Hingwala (P) Ltd. to buttress that the Tribunal has the power to rectify its order. The Tribunal held that once the issue has been settled by the Hon’ble Supreme Court whereby the power of the Tribunal has been interpreted in the manner mentioned in the case of Reliance Telecommunication then this judgment of the Hon'ble Delhi High Court has no significance and relevance.

In connection with grounds not adjudicated by the Tribunal, it held that these grounds were not raised specifically by the assessee during the course of the hearing and accordingly, there was no occasion to decide the issue.

Our Comments

During assessment proceedings before ITAT or any other tax authority, it is important that all the grounds are specifically raised/pressed for adjudication/discussion. Furthermore, the ITAT does not have the power to recall an order except where a mistake is apparent from the record, as held by the SC in the case of Reliance Telecom Ltd.

Confirms deletion of Section 271G penalty; notes no violation of Section 92D, follows earlier order

Laxmi Diamond Private Limited [TS- 342-ITAT-2024(Mum)-TP]

Facts of the case

The assessee, being the flagship entity of the group, is mainly engaged in a diamond business related to the manufacturing and training segment of diamond industries.

During the proceedings before the TPO, the assessee was unable to submit the documents as per the provisions of Section 92D(3) of the ITA read with rule 10(B)(1)(e) of the Income Tax Rules, 1962 (the rule). The Ld AO initiated the penalty proceedings under Section 271G and finally, the penalty was levied at 2% of the total value of relevant international transactions.

The aggrieved assessee filed an appeal before the Ld CIT(A). The Ld CIT(A), considering the asessee’s submission, deleted the penalty and allowed the assessee’s appeal.

Aggrieved with the appeal order, the Revenue filed an appeal before the ITAT.

Revenue’s contention before ITAT

The Revenue argued that the CIT(A) erred in deleting the penalty under Section 271G by holding that the assessee had made substantial compliance , failing to note that under TNMM adopted by the assessee, the profit, including segmental account of the international transaction had to be furnished as asked for, whereas the assessee had only furnished the entity level margin.

Held by ITAT

The ITAT dismissed the appeal of the Revenue basis the facts and circumstances of levy of penalty under Section 271G for AY 2011-12 being identical to that for AY 2012-13. In the order for AY 2011-12, the ITAT observed that keeping in view of the nature of the diamond business in which the assessee is engaged, it has substantially complied with the requirement of filing documents with respect to segmental amount relating to transactions with AE and non-AEs for determination of ALP of international transaction. Furthermore, the ITAT relied on the observation of CIT(A), wherein it observed that since there is no adjustment made in the arm’s length price, the penalty so imposed is not justified. In doing so, CIT(A) also relied on various judicial pronouncements having similar facts, wherein penalty has been deleted under Section 271G of the ITA, when no adjustment in arm’s length price was made.

Our Comments

The ITAT upheld the decision of CIT(A), which highlights that when the TPO makes no TP addition after perusal of TP study report, then the penalty levied under Section 271G for non-submission of documents under Section 92D is not sustainable.

Mineral Area Development Authority & Anr. vs Steel Authority of India & Anr. [TS-287-SC-2024- NT] and [TS-318-SC-2024-NT]

Whether Royalty in respect of mineral rights payable under the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) is in the nature of ‘tax’, and whether the State legislatures lack the competence to levy tax on such mineral rights?

Note: Regulation of mines and mineral development is enumerated under both the Union List (Entry 54 of List I) and the State List (Entry 23 of List II) of the Seventh Schedule to the Constitution. The entrustment of the subject to the State legislatures under Entry 23 of List II is subject to the provisions of Entry 54 of List I.

Furthermore, Entry 50 of List II pertains to “taxes on mineral rights subject to any limitations imposed by the Parliament by law relating to mineral development.”

On the other hand, Entry 49 of List II empowers States to levy taxes on land and buildings.

Facts

• In India Cement vs State of Tamil Nadu [(1990) 1 SCC 12 (34)], a seven- Judge Bench of the Supreme Court held that the Royalty payable under the MMDR Act is a tax and the States lack competence to either levy taxes on mineral rights covered by the said Act or use the same as a measure for imposing tax on mineral-bearing lands under Entry 49 of List II (State List).
• Later, a Constitution Bench of the Supreme Court, in State of West Bengal vs Kesoram Industries Ltd [(2004) 10 SCC 201 (71)] held that the ratio in India Cements (supra) stemmed from an inadvertent error and clarified that Royalty is not a tax.
• In the aftermath of the aforesaid decisions, various States continued to impose taxes on mineral-bearing land in pursuance of Entry 49 of List II by applying the mineral value or Royalty as the measure of the tax.
• The levies were assailed before the High Courts and when, in one such matter, a civil appeal was filed before the Apex Court, the three- Judge Bench noticed the divergence between India Cements (supra) and Kesoram (supra) and, accordingly, referred the relevant questions to a nine-Judge Bench.

Ruling

• After extensively discussing the scheme of distribution of legislative powers and constitutional limitations, the nine-Judge Bench, proceeded to delve into pertinent questions as follows:
  1. Whether Royalty under the MMDR Act is in the nature of tax?
     • The major conceptual differences between ‘Royalty’ and ‘tax’ are:
       • The proprietor charges Royalty as a consideration for parting with the right to win minerals, while a tax is an imposition of a sovereign;
       • Royalty is paid in consideration of doing a particular action, i.e., extracting minerals from the soil, while tax is generally levied with respect to a taxable event determined by law; and
       • Royalty generally flows from Tax Street August 2024 the lease deed as compared to tax which is imposed by the authority of law.
     • Contractual payments due to the government cannot be deemed to be a tax merely because the statute provides for their recovery as arrears.
     • The principles applicable to ‘Royalty’ also apply to ‘dead rent’, which is imposed in the exercise of the proprietary right (and not a sovereign right) by the lessor to ensure that the mine is not kept idle, and there is constant flow of income. Dead rent is an alternative to Royalty.
  2. Whether MMDR Act imposes restrictions on States’ power to tax mining rights under Entry 50 of List II?
     • The field of taxation cannot be derived from the regulatory legislative entries and has to be derived from a specified taxing entry.
     • Taxation of mineral rights vests with the State legislature under Entry 50 of List II. Parliament can neither impose a tax on mineral rights under Entry 54 of List I, nor resort to its residuary powers under Entry 97 of List I to tax such mineral rights.
     • The fixation of Royalty rates under section 9 of MMDR Act falls within the regulatory powers of the Parliament under Entry 54 of List I.
     • Further, there is no specific provision in the MMDR Act which imposes limitations on the powers of the States to tax mineral rights. Hence, the scheme of MMDR Act cannot by a process of stretched construction be read to limit the taxing powers of States under Entry 50.
     • Unless the Parliament imposes a limitation ‘by law’ relating to mineral development, the plenary power of the State legislature is unaffected.
  3. Whether States can tax mineralbearing land under Entry 49 of List II? Whether mineral produce or Royalty can be used as a measure to tax mineral-bearing lands?
     • In their natural state, minerals or ores are part of the earth and remain embedded there unless extracted. It is also established that ‘lands’ include everything over and below the surface. Therefore, constitutionally speaking, sub-soil minerals also form a part of land.
     • There is a distinction between the legislative fields – Entry 49 relates to the taxation of land as a unit, whereas Entry 50 provides for the taxation of mineral rights. Ultimately, however, it must be borne in mind that both Entries 49 and 50 fall within the domain of the State legislatures.
     • Moreover, the fact that Entry 50 of List II pertains to taxes on mineral rights would not preclude the State legislature from using the measure of mineral value or mineral produce or Royalty under Entry 49 of List II. Both entries operate in different fields without any overlap.
     • The State legislature has legislative discretion to determine the appropriate measure for the purposes of quantifying taxes, so long as there is a reasonable nexus between the measure and the nature of the tax.
     • Accordingly, the Apex Court, with 8:1 majority, overruled the decisions inter alia in India Cements (supra), Orissa Cement Ltd. vs State of Orissa [1991 Supp (1) SCC 430], State of M.P. vs Mahalaxmi Fabric Mills Ltd. [1995 Supp (1) SCC 642], Saurashtra Cement and Chemical Industries Ltd. vs Union of India [(2001) 1 SCC 91] to the extent of the observations made in the present case.

Dissenting view

Justice B.V. Nagarathna dissented from the majority opinion, stating that the primary goal of the MMDR Act is to encourage mineral development and mining activities. Accordingly, allowing States to impose additional levies and cesses on top of the royalties would undermine this objective.

Consequent to the aforesaid verdict, the Supreme Court was called upon to determine the applicability of this judgment. The Union pressed for invocation of the doctrine of prospective overruling, considering that India Cements held the field for 35 years.

Bearing in mind the consequences that would emanate from the past period, the Supreme Court directed the following conditionalities to prevail, vide Order dated 14 August 2024:

• While the States may levy or renew demands of tax, if any, pertaining to Entries 49 and 50 of List II, the demand shall not operate on transactions made prior to 1 April 2005;
• The time for payment of tax demand shall be staggered in installments over a period of twelve years commencing from 1 April 2026; and
• The levy of interest and penalty on demands made for the period prior to 25 July 2024 shall stand waived for all the assessees.

Our Comments

The nine-Judge Bench judgement finally settled the decades-old controversy relating to the taxation of mineral rights by the States.

Besides demarcating the scheme of distribution of legislative powers between the Union and the States, the judgment also explains the difference between the two types of legislative subjects, viz regulatory and tax subjects.

This verdict would clearly have a bearing on the ongoing litigation with respect to the levy of service tax/GST on Royalty vis-à-vis mining operations or explorations.

It may be expedient for the GST Council/CBIC-TRU to issue appropriate clarification on the implications of this judgment on the levy of tax on the grant of mining lease/Royalty under the GST regime.