From The Judiciary

How should the Dividend Distribution Tax (DDT) under Section 115-O paid by an Indian company to a non-resident shareholder be determined: by the rate prescribed under the Income-tax Act, 1961 (the Act), or by the rate specified in the Double Taxation Avoidance Agreement (DTAA)?

Total Energies Marketing India Pvt. Ltd TS-660-ITAT-2023(Mum)

Facts

The assessee filed a return of income declaring an income of INR 1.86 billion and declared a dividend of INR 732.5 million to two shareholders. The assessee paid DDT under Section 115-O at 20.361%, amounting to INR 149.1 million, which was accepted by the Assessing officer (AO). However, AO disallowed reimbursement of demurrage charges and reimbursement of salary paid to seconded employees on account of non-deduction of tax at source under Section 195.

Aggrieved, the assessee carried the matter in appeal before the CIT(A), which was ruled partly in favor by deleting the disallowance under Section 40(a)(i). Before CIT(A), the assessee also claimed a refund of excess DDT for the reason that such dividend is chargeable to tax at 5% as per India- Slovenia DTAA read with MFN clause in India-France DTAA, for which AO was directed to give the credit of DDT after verification of the return of income, if eligible under the law. Aggrieved, the AO filed an appeal with the Tribunal, wherein the assessee has filed a cross objection for a refund of the excess DDT paid.

Held

ITAT denied the assessee’s plea for a DDT refund on dividend paid to French shareholders in excess of tax-rate prescribed under India-France DTAA (10%) when read with MFN Clause in light of the tax-rate prescribed under India-Slovenia DTAA (5%).

ITAT also relied on a Special Bench ruling in the assessee's own case wherein it was held that where a dividend is declared, distributed, or paid by a domestic company to a nonresident shareholder, which attracts DDT under Section 115-O then tax shall be paid by the domestic company at the rate specified under Section 115-O and not the tax-rate applicable to the non-resident shareholder in the relevant DTAA for taxation of dividend.

Furthermore, ITAT also relied on SC’s ruling in the case of Nestle SA, wherein it held that a notification under Section 90(1) is necessary and a mandatory condition for a Court, Tribunal, or an authority to give effect to a DTAA, or any protocol changing its terms that has the effect of altering the existing provisions of law.

ITAT upheld CIT(A)’s order to delete disallowance under Section 40(a)(i) on account of non-deduction of tax at source under Section 195.

Our Comments

It is important to note that the tax treaty benefit cannot be given to a domestic company paying dividends unless the contracting states to a tax treaty intend to extend treaty protection to the said company paying.

The ITAT's ruling has relied on and further confirmed the recent SC decision on the non-applicability of the benefit of the MFN clause to dividend income.

Can offshore supplies and inextricably linked services be brought under the ambit of taxability in India?

DSD Noell GMBH TS-714-ITAT-2023(DEL)

Facts

DSD Noell GMBH (assessee), a German company, entered into an agreement with Hindustan Construction Company Ltd. (HCC), an Indian company, to carry out hydro-mechanical works in relation to setting up the Hydro Electric Power Project. The assessee received consideration from HCC for offshore supply of plant and equipment as well as for offshore services (involving supply of related drawings and designs), which were not offered to tax in India and the same was disputed by the AO as well as CIT(A).

Pursuant to the above, an appeal was filed with the Tribunal.

Held

The Delhi ITAT deleted the addition and held that no part of the consideration received outside India for offshore supplies of plant, equipment, and spares could be deemed to accrue or arise in India as per Section 9 in the hands of the assessee. The ITAT further observed that the assessee had no Permanent Establishment (PE) in India, and such consideration would only be in the nature of business income not attributable to PE in India and hence not taxable under Article 5 r.w. Article 7 of the India-Germany DTAA.

The ITAT noted that plant and equipment supplied to HCC were designed and manufactured outside India, the title was duly passed on to the customer outside India on a FOB basis, consideration for such offshore supplies was also received outside India, and all activities such as manufacturing, fabrication, designing, etc. of plant and equipment was undertaken outside India.

ITAT relied on SC judgment in the case of Ishikawajima-Harima and jurisdictional HC judgment in National Petroleum to observe where the property in respect of the goods is transferred to the buyer outside India, the sale of such goods has to be regarded as having completed outside the taxable territories of India. Hence, the income from such sale is not liable to tax in India.

Regarding offshore services of drawing and designs, ITAT observes that the drawings and design supplied are inextricably linked with the plant and equipment supplied by the assessee; ITAT relied on Jurisdictional HC judgment in the case of Linde AG and co-ordinate bench ruling in the case of SMS Concast to observe, “if design and engineering are inextricably linked with the manufacture and fabrication of the material and equipment to be supplied from overseas, and form an integral part of the said supply, then the services rendered would not be amenable to tax as Fees for Technical Services (FTS).

Our Comments

ITAT has relied on the landmark judgment of Ishikawajima-Harima and held that there is no accrual, or arising or deemed accrual or arising of income from offshore supplies as per Section 9(1)(i) of the Act. Furthermore, in the absence of a PE as per Article 5, no income would be attributable, and hence, the profits would be considered as business profits not chargeable to tax in India as per Article 7 of the DTAA between Germany and India.

As regards offshore services, the designs forming an integral part of the plant or equipment shall not be taxable as FTS in light of the judicial pronouncements laid down in this context.

Withdrawal of Transfer Pricing related grounds due to Mutual Agreement Procedure (MAP) resolution

TechAspect Solutions Private Limited ITA No.178/Hyd/2021

Facts

The taxpayer had entered into MAP with the US Competent Authority (CA) for TP adjustment made for international transactions undertaken with its US-based Associated Enterprise (AE). In this regard, the taxpayer has appealed before ITAT to withdraw TP grounds for such a transaction.

On the other hand, the AO made TP adjustment for software development services rendered to its UK-based AE, wherein the amount of adjustment was insignificant. The taxpayer made an appeal before the ITAT to withdraw the TP grounds for this transaction as well as its previous case.

Held by the ITAT

In the first instance, referring to the MAP resolution provided by the CA, ITAT observed that under MAP provisions, the taxpayer needs to enclose the proof for withdrawal of the ongoing appeal. Considering the above, ITAT granted the permission to withdraw the TP grounds.

Furthermore, in the second instance, considering the quantum of TP adjustment made for the transaction with UK-based AE, ITAT permitted the withdrawal of transfer pricing grounds pertaining to the determination of ALP of transactions of the AE situated in the UK due to the smallness of the amount. However, it was stated by the ITAT that withdrawal of the grounds may not be treated as precedent in the subsequent or previous assessment years having identical facts.

Our Comments

Given the challenges with the domestic tax law appeal process, MAP and Advance Pricing Agreement (APA) continue to be a preferred option for resolving/ preventing cross-border tax disputes, particularly in the area of TP. Such outcomes would further strengthen the relevance of MAP as an effective tool for dispute resolution mechanisms.

Order of TPO declared time barred due to delay in affixing the digital signature on the order document

Zydus Wellness Products Limited ITA No. 1488/Mum/2021

Facts

The taxpayer’s case was referred by the AO to the Transfer Pricing Officer (TPO) for AY 2016-17. The order under Section 92CA (3) of the Act was dated 31 October 2019 but digitally signed by the TPO on 1 November 2019. Furthermore, the note at the bottom of page 1 of the order specifically mentioned that “if digitally signed, the date of the digital signature may be taken as the date of the document.”

The taxpayer, referring to the period of limitation referred to in Section 153 of the Act, challenged the validity of the order passed by the TPO under Section 92CA(3) of the Act and, thereby making the assessment order dated 30 June 2021 under Section 143(3) of the Act also as time-barred.

The period of limitation for completion of the TP assessment in the case of the taxpayer for the impugned AY was 31 October 2019.

Held by the ITAT

ITAT, taking reference from Section 282A of the Act read with Rule 127A of the Income Tax Rules, 1962 (the Rules) as well as the Board Instruction no. 1/2018 dated 12 February 2018 stated that unless the CA signs the order, it is incomplete, hence, not valid Thus, the date of the order is the date on which the CA signs. In view of the same, in the current scenario, the order is said to have been passed on 1 November 2019, which was the date when the TPO digitally signed it and not the date of the order, i.e., 31 October 2019.

Furthermore, as per the provisions of Section 153(1) of the Act, no assessment order shall be made under Section 143(3) or 144 at any time after the expiry of 21 months (extended by 12 months in the case reference under Section 92CA(1) of the Act is made to the TPO) from the end of the AY in which the income was first assessable. Furthermore, Section 92CA(3A) mandates that an order under Section 92CA(3) may be made at any time before 60 days prior to the date of limitation referred to in Section 153.

The ITAT, in view of the above, held that since the order was passed beyond the period of limitation (i.e., 60 days prior to the date of limitation as per Section 153), the extended period (i.e., 12 months in case reference made under Section 92CA(1) of the Act) is not available to the AO making the final assessment order dated 30 June 2021 also time-barred.

Our Comments

The ruling outlines the fact that the order is valid as on the date of signing of the order and not the date of the order. Though it’s a very peculiar case, it highlights the relevance of challenging the validity of the TP Order by way of filing an additional ground of appeal (if not taken earlier) before the Appellate Authorities.

Denial of Input Tax Credit (ITC) on account of GSTR-2A vs. GSTR-3B mismatch

The Asst. Commissioner of State Tax & Ors. vs. Suncraft Energy Private Limited TS-653-SC-2023-GST

Facts

• The Revenue had proceeded to reverse the ITC availed by the appellant in FY 2017-18 basis ITC mismatch in GSTR-2A vs. GSTR-3B. The appellant’s stand that it had fulfilled all the conditions of Section 16(2) was rejected.
• Hence, the appellant approached the Calcutta HC by relying on landmark SC decisions in Bharti Airtel Ltd [(2022) 4 SCC 328] and Arise India Limited [MANU/DE/3361/2017] as well as the Press Releases dated 4 May 2018 and 18 October 2018.
• Observing that the Revenue had neither conducted any inquiry against the vendor nor brought out an exceptional case like collusion between the parties, missing vendor, or closure of business and such other contingencies, HC held that the Revenue was not justified in straightaway directing the appellant to reverse the ITC.
• It further emphasized the clarification that GSTR-2A is in the nature of taxpayer facilitation and does not impact the ability to avail ITC on the self-assessment basis in consonance with Section 16.
• Accordingly, HC allowed the appeal with a direction to the GST authorities to first proceed against the vendor and to initiate proceedings against the appellant only under exceptional circumstances.
• Against this, the Revenue approached the SC by way of a SLP.

Ruling

• Having regard to the facts and circumstances of the case and the low demand, SC refused to interfere in the matter.
• Accordingly, it dismissed the SLP filed by the Revenue.

Our Comments

Considering that the dismissal of SLP was with regard to the facts and circumstances of the case and the low demand, the same can be used for persuasive value in similar facts and circumstances but not as a binding precedent.

The question of law has been kept open, and the Apex Court could still entertain SLPs against HC judgments that have independently arrived at the same conclusion.

Entitlement to exemption from GST Compensation Cess to SEZ units

Maithan Alloys Ltd vs. Union of India TS-677-HC(AP)-2023-GST

Facts

The petitioner is an SEZ unit engaged in the manufacture of ferroalloys.

Upon seeking clarification, the Director (SEZ) informed the petitioner that it was not entitled to exemption from GST Compensation Cess payable on the import of coal unless – (i) The Central Board Of Indirect Taxes and Customs (CBIC) issues an exemption Notification, or (ii) the First Schedule under Section 7 of the SEZ Act is amended by virtue of power under Section 54 of the said Act.

Consequently, the Director (SEZ) demanded the submission of a bond along with a bank guarantee as a condition to allow the goods to be brought into the SEZ area.

Hence, the petitioner approached the Andhra Pradesh HC.

Ruling

HC noted that Sections 7, 26, and 50 of the SEZ Act are the three main provisions that allow the SEZ units to claim exemptions on duties, tax, cess, and certain drawbacks and concessions.

In terms of Section 7, the GST (Compensation to States) Act, 2017 is not specified in the First Schedule of the SEZ Act, which is a sine qua non for claiming exemption.

Referring to the Apex Court decision in Hind Energy and Coal Beneficiation (India) Ltd [AIR 2018 SC 5318], HC noted the distinction between ‘tax,’ ‘duty’ and ‘cess’ and found that the phrase “duty of customs” alone is used in Section 26(1)(a) of the SEZ Act, and not “cess”.

A conjunctive study of Section 26(1) (a), 2(zd) of the SEZ Act and Section 2(15) of the Customs Act would pellucidly tell that the phrase “duty of customs” only refers to the duty leviable under the Customs Act, and not cess under GST Compensation Act.

Hence, HC did not accept the petitioner’s contention that the duty exemption under the Customs Act/ Customs Tariff Act encompasses the Compensation Cess as well, merely because its rate of tariff is mentioned in Section 3(9) of the Customs Tariff Act.

Consequently, HC found no merit in the writ petition while distinguishing the ruling in Flextronics Technologies (India) Pvt. Ltd [2016 (341) ELT 522 (Mad.)] as it dealt with anti-dumping duty and not cess.

Our Comments

The SEZ units engaged in the import/ procurement of goods leviable to GST Compensation Cess may revisit their positions pursuant to this ruling.

While the matter could travel to the Apex Court, it would be worthwhile for the industry to make a representation to the government to accord similar treatment to the Compensation Cess as given to Customs Duty/IGST.

ITAT Delhi: Significant disparities in valuation figures while determining fair value, liable for a comprehensive inquiry; matter remanded back for fresh determination

Citation: Sharp Eye Broadcasting Pvt.Ltd. (Delhi ITAT) (ITA No 1105/ Delhi/2020), 20 November 2023

In the given case, the assessee, a broadcasting and telecast company, issued 4,90,000 fresh equity shares having a face value of INR 10 each at a premium of.92 per share, based on a valuation report wherein the Discounted Cash Flow (DCF) Method was followed. The AO rejected the report, claiming projected cash flows were exaggerated and also led to less than 1% of actual achievements. The AO determined the FMV at Rs.17.18 per share based on the Net Asset Value (NAV) method as per Rule 11UA of the Income Tax Rules, 1962. The excess premium was added to the assessee's income as per Section 56(2)(viib) of the Act.

The CIT(A) deleted the addition, holding that the AO cannot impose valuation methods and projections shouldn't be compared to actuals.

The ITAT ruled that the AO is entitled to scrutinize the basis of projections that resulted in such hefty valuations and to scrutinize wide variances in estimations. The ITAT thus remanded the matter back to CIT(A) for a fresh determination.

Our Comments

The ruling emphasizes that the AO has powers to look into the valuation approach, and if he finds gross irregularities, they will have to be justified by the taxpayers, failing which he can make a fresh valuation.

Delhi HC: The eldest daughter of HUF to qualify as 'Karta' dismisses the challenge that only male members can be 'Karta.'

Citation: Manu Gupta vs Sujata Sharma & ORS (Delhi HC) (RFA(OS) 13/2016 & CM APPL. 6041/2016), (SC), 4 December 2023

In this case, the eldest surviving daughter of a Hindu Undivided Family (HUF) claimed her right to become the Karta based on the Hindu Succession (Amendment) Act, 2005, which grants daughters equal rights in the coparcenary property as a son. The claim was challenged by the eldest surviving male member of the HUF, who argued that the amendment only recognized equal inheritance rights for female members but did not grant them the right to manage the HUF property as Karta.

The Delhi HC has held that the amendment does not impose any such restrictions. The Hindu Succession (Amendment) Act, 2005, grants daughters the same rights (by birth) in the coparcenary property as a son, including the right to be a Karta. The HC concluded that neither the Legislature nor the traditional Hindu Law in any way limits the right of a woman to be a Karta. The HC also stated that if there were concerns about a female Karta's skills or influence, other coparceners had remedies like seeking partition or challenging wrongful property alienation.

Our Comments

This ruling is expected to have a widespread impact, particularly in HUFs across the country, where females hold the position of the eldest surviving member. The court has emphasized that societal perceptions should not be a basis for denying rights explicitly granted by the legislature.