From The Judiciary

Whether Foreign Tax Credit (FTC) can be denied on the grounds of belated filing of requisite Form-67?

Rahul Anand TS-901-ITAT-2024(Kol)

Facts

Rahul Anand, the assessee, filed an appeal against the order of the Commissioner of Income Tax (Appeals) in Kolkata, which dismissed his claim for Foreign Tax Credit (FTC) for the assessment year 2019-20. The issue arose when the assessee filed his income tax return on 27 August 2019 but did not submit Form 67, required for claiming FTC, within the prescribed due date. The form was only submitted on 8 April 2021, well after the return was processed on 23 March 2021. The assessee contended that his substantive right to claim FTC under the DTAA should not be denied due to the procedural delay in filing Form 67. The Commissioner (Appeals) upheld the denial, referring to the CBDT notification which required the form to be filed before the due date of the income tax return.

Held

The Income Tax Appellate Tribunal (ITAT) held that the filing of Form 67 is a directory requirement, not a mandatory one, and the failure to file it within the prescribed time does not extinguish the taxpayer's right to claim FTC.

The Tribunal noted that the provisions of the DTAA, which allow for the elimination of double taxation, override the procedural rules of the Income Tax Act.

Judicial precedents, including the ruling in Ashish Agrawal vs. Income Tax Officer and Duraiswamy Kumaraswamy vs. PCIT, supported the view that procedural delays should not prevent the taxpayer from claiming FTC if the form is filed before the final assessment. Consequently, the ITAT directed the Assessing Officer to allow the FTC claim in accordance with the DTAA between India and Thailand, emphasizing that the taxpayer's right to claim the credit for foreign taxes paid should be honoured.

Our Comments

This case highlights that the late filing of Form 67, a procedural requirement for claiming Foreign Tax Credit (FTC), does not invalidate the taxpayer's right to claim FTC under the relevant DTAA.

Notably, as of now, the time available to file Form 67 for claiming FTC, is the end of the relevant assessment year and not along with the due date to file tax return.

Does the operation of a Liaison Office and agents in India create a Permanent Establishment under the India-USA DTAA for a foreign company?

Western Union Financial Services Inc. TS-920-HC-2024(DEL)

Facts

Western Union, a USA-based money transfer company (Assessee), operates in India through a Liaison Office (LO) and various agents, including banks and tour operators. The LO, approved by the Reserve Bank of India (RBI), is involved solely in non-commercial functions, such as training agents, distributing literature, and maintaining contacts with government officials. It does not engage in income-generating activities. Western Union’s agents in India facilitate money transfers and earn a commission of 25%-30%.

The revenue officers contended that the LO’s activities were not merely preparatory or auxiliary. They argued that the LO’s role in training agents and assisting in software installation contributed directly to the company’s business, thereby potentially creating a Fixed Place PE or Dependent Agent PE in India. They further claimed that the commission earned by agents, combined with the LO's activities, could establish a taxable presence in India under the India-U.S. DTAA.

Held

The ITAT ruled in favor of Western Union, determining that the activities of the LO were indeed preparatory and auxiliary in nature, as they were primarily focused on agent training and liaising with authorities, and did not directly contribute to income generation in India. The Tribunal emphasized that preparatory activities, such as the LO’s functions, do not establish a Permanent Establishment under the DTAA. The court also rejected the argument that the use of software or agents' premises could lead to the creation of a PE. In conclusion, there was no Fixed Place PE or Dependent Agent PE, as the activities in India did not meet the threshold required for a PE under the India-U.S. DTAA.

Our Comments

This case calls attention, that just having a presence or doing preparatory or auxiliary activities in a Source country is not enough to create a Permanent Establishment (PE) for tax purposes; only substantial business operations that generate income will trigger tax exposure.

Whether service of order / notice through online mode alone could be considered as sufficient compliance with Section 169 of the Tamil Nadu GST Act?

Mr. Sahulhameed & Ors. vs. The Commercial Tax Officer, Tuticorin-II & Ors. W.P. (MD) No. 26481 of 2024

Facts

The petitioners had approached the Madras HC challenging the service of notices / orders only by uploading on the web portal and not by any other modes as prescribed under Section 169 of the Tamil Nadu GST Act.

They submitted that even though the provisions under Section 169 (1) (a) to (f) are disjunctive, they should be read conjunctively, failing which the basic principles of natural justice would be violated.

Countering these arguments, Revenue relied on the SC judgment in M. Satyanarayana vs. State of Karnataka and Anr. [1986 (2) SCC 512] to contend that Section 169 should be read only disjunctively and therefore, if any of the modes prescribed under clauses (a) to (f) were complied with by the Department, there would be no violation of natural justice principles.

Revenue also relied on Madras HC’s Division Bench judgements rendered in the context of Rule 52 of the Tamil Nadu General Sales Tax Rules (TNGST Rules).

Held

HC noted that in the earlier cases, the Division Bench had held that the authority would have to comply with any of the three modes under (a), (b), or (c) of Rule 52 and if such service was found not effective, then clause (d) would have to be complied with.

Hence, an application of these decisions to Section 169(1) would mean that clauses (a) to (c) thereof would be alternative and if such service was not practical, then clauses (d) to (f) would have to be followed.

As per the Court, an interpretation of Section 169 in such a manner would effectively comply with the principles of natural justice, as also the condition stipulated by Section 169(3) which mandates that the decisions, orders, summons, notices, or any communication sent by Registered / Speed Post shall be deemed to have been received by the assessee, unless the contrary is proved.

Consequently, a conjoint reading of sub-Sections (1), (2), and (3) of Section 169 amply made it clear that the State was obliged to comply with clauses (a) to (c) alternatively and thereafter, comply with clauses (d) to (f).

Even though clause (f) was preceded with the word ‘or’ indicating it to be disjunctive/alternative mode of service, a reading thereof would indicate that the same could be resorted to by the State if any of the preceding clauses were not practicable.

Therefore, the object of Section 169 was for strict observance of the principles of natural justice, held the Court.

Further, HC rejected Revenue’s reliance on Rule 149 of the CGST Rules which only provides for electronic issuance of notices/ summons/orders, holding that rules cannot circumscribe the mode provided in the statute.

In view of the above, HC concluded that Section 169 mandates a notice in person or by registered post or to the registered e-mail ID alternatively and on failure or impracticability of adopting any of the aforesaid modes, the State can, in addition, make the publication of such notice in the portal / newspaper through the concerned officials.

Accordingly, HC set aside the impugned assessment orders and directed reconsideration with the opportunity for the petitioners to respond and be heard.

Our Comments

Without a proper mechanism/tool in place, tracking of notices and orders on the GST portal has often proved to be a challenge for the businesses. Any failure in responding to such notices/ orders could lead them in a legal soup.

The present judgement of Madras HC could assist the taxpayers in defending against any adverse actions taken by the tax authorities, where such notices/ orders have only been uploaded on the GST portal.

Deletes TP-adjustment qua interest on overdue receivables, considers assessee's debt-free status

Temenos India Pvt. Ltd. IT(TP)A No.: 32/CHNY/2024

Facts of the case

Assessee is a captive service provider of software development services for banking solutions to its associated enterprise (‘AE’), Temenos AG. The case of the Assessee was selected for assessment and a reference u/s. 92CA of the ITA was made to the Transfer Pricing Officer (TPO). Pursuant to the Transfer Pricing assessment proceedings, the TPO passed an order u/s.92CA of the Act on 31 March 2023 treating the overdue outstanding trade receivables as international transaction. The credit period extended by the Assessee exceeding 30 days was considered as overdue receivables for determining adjustment on account of such receivables.The TPO applied LIBOR (London Interbank offered Rate) + 350 BPS (effective rate of 5.818%) on the outstanding receivables of INR 32,848 lakhs as on 31 March 2020 and imputed interest of INR 31,415,287 representing the arm’s length interest income from outstanding trade receivables.

Following the TPO’s order, the Assessing Officer (AO) passed the draft assessment order incorporating the aforesaid adjustment proposed by the TPO. The AO also made certain corporate tax addition/disallowances.

Aggrieved by the outcome, the Assessee filed objections before the Dispute Resolution Panel (DRP) which was dismissed by the DRP and the final order was passed by AO. The Assessee then filed an appeal against the order of the AO before the ITAT.

The contentions of the Assessee before the ITAT were as follows:

Not an international transaction: The Assessee contended before the ITAT that the receivables are consequential/ closely-linked/aggregated with the principle transaction which were already determined to be at arm’s length by the TPO. Furthermore, the Assessee contended that outstanding balance from debtors is a continuing debit balance arisen as a result of primary transaction and cannot be considered as a separate transaction for determination of arm’s length price.

Timely realization: The Assessee contended that the DRP and the TPO failed to appreciate that all the receivables were collected as per the agreed credit period as per the intercompany agreement and there were no overdue receivables.

Arbitrary application of credit period: It was contended that the credit period of 30 days imposed by the TPO is arbitrary, as the credit period specified in the intercompany agreement was 180 days. Further, the credit period provided by the comparable companies, and various judicial pronouncements allows a credit period of around 90 to 120 days.

Debt free company: Placing reliance on the Supreme Court ruling in the case of Bechtel India⁷, the Assessee contended that the Assessee company is debt-free company, no adjustment is required for imputing interest on outstanding trade receivables from its AEs.

Grant of working capital adjustment: The Assessee contended that TPO/ DRP should have granted a working capital adjustment, and by considering the impact of receivables on working capital, no separate adjustment on trade receivables was necessary.

Examination on a case to case basis: The Hon’ble High Court has previously held that delays in collecting payments for supplies, even beyond the agreed period, can occur due to various factors. The delays should be examined on a case-by-case basis. Additionally, the impact of such delays on the assessee’s working capital should be reviewed separately. If the assessee has already considered the effect of receivables on its working capital and profitability, particularly in comparison to its comparable, no further adjustment is necessary.

Outcome of the ITAT order

The Tribunal placing reliance on the judicial precedents cited by the Assessee during the proceedings, held that no transfer pricing adjustment shall be made to impute interest on outstanding trade receivables from the AE when the Assessee is a debt-free company. As a result, the transfer pricing adjustment imputing interest income on outstanding trade receivables was deleted.

Our Comments

In light of the facts and established legal precedents, the Tribunal has ruled in favor of the Assessee, determining that no transfer pricing adjustment is required to impute interest on outstanding trade receivables from AEs in the case of a debt-free company. The Tribunal highlighted the necessity of evaluating delays in receivables on a case-by-case basis, taking into account their specific impact on working capital and profitability. In the instant case, given that the Assessee was a captive service provider and relied solely on its own funds - it does not incur debt obligations; delayed receivables do not materially affect its financial position. This ruling is consistent with prior decisions by the Hon’ble Delhi High Court and the Supreme Court, reinforcing the conclusion that no further adjustments are justified in such circumstances.