From The Judiciary

Whether MFN clause can be invoked for IT and SAP support services not to qualify as FTS in light of make-available provisions?

Netafim Ltd ITA No.1427/Del/2015 & 975/ Del/2015 (Del)

Facts

The taxpayer is an entity incorporated in Israel. The taxpayer had provided IT and SAP support services to various group entities, including its subsidiary in India.

In the course of assessment proceedings, it was contended by the taxpayer that these services were not in the nature of ‘Fees for Technical Services’ (FTS) as they did not ‘make available’ technical knowledge to the service recipient. While making this claim, the taxpayer relied on the Most Favored Nation (MFN) clause of the India-Israel tax treaty to invoke the restricted scope of FTS from the India - Portugal and India – Canada tax treaties. The tax officer rejected the taxpayer’s contention and argued that MFN cannot be invoked in the absence of a separate notification by both countries. On further appeal, the DRP held that MFN can be invoked. However, the services are, in fact, ‘makingavailable’ technical knowledge and thus are in the nature of FTS. Aggrieved by the DRP’s decision, the taxpayer filed an appeal with the Tribunal.

Held

The Tribunal allowed the taxpayer to take benefit of the MFN clause and apply the restrictive provision of FTS as contained in India-Portugal and India-Canada tax treaty by relying on jurisdictional High Court ruling in the case of Steria (India) and observed that tax treaty provisions are subject to the Protocol without a separate notification. The Tribunal observed that the taxpayer procured SAP licenses for group entities and the expense incurred on such licenses is recharged on a cost-to-cost basis. Furthermore, the Tribunal held that the taxpayer had not made available technical knowledge, experience, or skill know-how that could have enabled the recipient of such services to apply technology independently and without any assistance of the taxpayer.

Our Comments

The Delhi Tribunal held that the benefit of restrictive scope of the FTS definition in a tax treaty can be availed through the MFN clause as per Protocol without a separate notification.

Furthermore, it held that IT and SAP support services cannot be qualified as FTS when there is a ‘make available’ clause.

Can Revenue go beyond a TRC to challenge tax treaty benefits, residency and beneficial ownership?

Blackstone Capital Partners (Singapore) VI FDI Three Pte. Ltd TS-41-HC-2023(DEL)

Facts

The taxpayer earned capital gains from the sale of shares in an Indian company that was acquired in April 2013. The taxpayer claimed exemption from capital gains under the India- Singapore tax treaty by relying on its Tax Residency Certificate (TRC) issued by the Singapore tax authority.

The taxpayer’s return was processed without any discrepancies. However, a reassessment was initiated on the grounds that the capital gains should be taxable in India. The Revenue contended that the taxpayer was not the beneficial owner of the shares and just by furnishing TRC, it does not become eligible to claim any relief under the tax treaty. Aggrieved by the reassessment proceedings, the taxpayer filed a writ petition with the Delhi High Court.

Held

High Court held that TRC is statutorily the only evidence required to be eligible for benefit under tax treaties and questioning this is wholly contrary to the Indian government's consistent policy and repeated assurances to Foreign Investors. The High Court relied on Punjab and Haryana High Court’s decision in the case of Serco BPO, wherein it was held that TRC is sufficient to claim benefit under the tax treaty and the Revenue did not challenge this decision before the Supreme Court.

Furthermore, the High Court was of the opinion that the Inland Revenue Authority of Singapore has granted the taxpayer the TRC after a detailed analysis of the documents, and the Indian authorities cannot disregard the same as doing the same would be contrary to international law.

The Court also relied on Circular No. 682, dated 30 March 1994, and the Circular No. 789 dated 13 April 2000, issued by the Central Board of Direct Taxes (CBDT) and also the press release dated 1 March 2013, wherein it has been clarified that TRC is a valid and sufficient document for establishing residency and beneficial ownership.

With respect to Revenue’s contention on beneficial ownership, the High Court held that capital gain was to be taxed on the basis of legal ownership and not on the basis of beneficial ownership. The Court further noted that the concept of beneficial ownership, at the relevant time under the India-Singapore tax treaty, was attracted for taxation purposes only qua three transactions, i.e., dividend, interest and Royalty and not for capital gains.

In light of the above, the High Court permitted the taxpayer to claim an exemption from capital gains under the India-Singapore tax treaty on the basis of its TRC.

Our Comments

The Delhi High Court held that Revenue cannot go beyond a TRC to deny tax treaty benefits to a non-resident.

Furthermore, it was held that the concept of beneficial ownership is relevant for three transactions under the tax treaty viz. interest, dividend and Royalty, and not for capital gains.

Advances to Associated Enterprises are considered as Loans and not Quasi Equity and charging of interest to the specific period

M/s Adani Power Limited ITA Nos. 3563/Ahd/2015 & 2216/ Ahd/2016 TS-82-ITAT-2023(Ahd)-TP

Facts

TDuring AYs 2010-11 and 2011-12, the taxpayer, Adani Power Ltd, advanced funds to its Associate Enterprises (AE)s:

• M/s Adani Power Pte Ltd incorporated with the object of investing in coal mines and carrying on the business of an investment holding company, and
• M/s Adani Shipping Pte Ltd incorporated with the object of carrying on the business of chartering and owning ships.

Taxpayers contested that funds advanced are quasi-equity and not debt. However, the Transfer Pricing Officer (TPO) noted that advances were in the nature of debt as per financial statements. Thus, TPO held that the taxpayer should have charged interest at 5.38%, as Prime Lending Rate is prevalent in Singapore.

The Commissioner of Income Tax (Appeals) [CIT (A)] revised benchmarking of interest at 2.48% p.a. for Adani Shipping Pte Ltd and 2.62% for Adani Power Pte Ltd on the basis that the interest rate should be benchmarked to the currency concerned in which the loan has to be repaid (USD in this case). Along with that, CIT(A) also restricted the period of interest to the specific period for which the loan was advanced to the AEs, and not for the entire year.

Held by ITAT

The Ahmedabad Income Tax appellate tribunal (ITAT) concluded that the amount advanced to the AEs is to be treated as a loan. Nothing on record supported that the advances were quasi-capital. Furthermore, ITAT relied on the judgment of Ahmedabad ITAT in the case of M/s Kalpataru Power Transmission Ltd vs CIT (A)- Gandhinagar¹ and M/s Soma Textile & Industries Ltd vs CIT(A)². for considering advances to AEs as loans.

Ahmedabad ITAT also upheld that the CIT (A) correctly observed that:

• Arm’s Length Pricing (ALP) of the interest rate for the loan advanced to a foreign subsidiary should be computed based on the marketdetermined rate applicable to the currency in which the loan has to be repaid, i.e., USD.
  Reliance was placed by Ahmedabad ITAT judgment on Hon’ble Delhi HC ruling in CIT vs M/s Cotton Naturals (I) (P.) Ltd³ and Delhi ITAT ruling in M/s Assotech Moonshine Urban Developers (P.) Ltd⁴.
• Ahmedabad ITAT also concluded that the interest is to be computed only for the period for which the loans were advanced to AEs and not for the entire year.

Our Comments

Interest-free loans to related parties are a very big area of concern from a Transfer Pricing standpoint. It has found a very low level of acceptability from the tax authorities. In the given case, the second appellate authority (i.e., ITAT) has completely rejected the argument of the taxpayer to justify an interest-free loan.

Whether duty drawback to be considered as part of the Operating income or Non-Operating Income?

M/s Kirloskar Toyota Textile Machinery Private Limited IT (TP) A No. 271/Bang/2021 TS-112-ITAT-2023(Bang)-TP

Facts

The taxpayer is a company engaged in the business of manufacturing textile machinery. TPO recomputed taxpayer’s segmental financials by treating duty drawback as non-operating in nature. The taxpayer raised objections before the DRP and DRP confirmed the TPO’s decision by relying on the Hon’ble Supreme Court case of Liberty India vs CIT⁵.

An appeal was filed before the Bangalore Tribunal stating that Duty drawback is a benefit arising from business operations and, therefore, should be considered part of operating income.

Held by the ITAT

Bangalore ITAT held the following:

• Duty drawback is provided to the manufacturer and exporter for the purpose of compensating in the duty component, which is already included in the cost of raw material and the duty drawback received against the duty paid is part of the operating profit of the taxpayer. Reliance was placed on the judgment of the Tribunal’s coordinate Bench in the Sami Labs case. Ltd (supra) vs. CIT⁶ and judgment of Hon’ble Bombay High Court rendered in the case of CIT Vs. Welspun Zucchi Textiles Ltd. (supra)⁷.
• Bangalore ITAT also noted that it should be ensured that such an export incentive is in respect of the present year’s and previous years’ turnover.

Our Comments

The judgment would provide clarity for the taxpayers at large on the issue where the tax authorities have often been taking the view that export incentives are to be treated as non-operating.

Literal interpretation of the definition of Associate Enterprises u/s 92A (2) of Income-tax Act, 1961

M/s Kirloskar Toyota Textile Machinery Private Limited IT (TP) A No. 271/Bang/2021 TS-112-ITAT-2023(Bang)-TP

Facts

The taxpayer is a company established in the British Virgin Islands (BVI) and is primarily engaged in investment activities. It is a wholly-owned subsidiary of M/s. United Spirits Ltd. (USL). The taxpayer executed a Share Purchase Agreement (SPA) with a Dutch company (Relay BV) (whose ultimate holding company was Diageo Plc) to sell shares of USL. The taxpayer benchmarked the transaction at INR 1440 per share, basis the open offer price at which Relay purchased shares of USL from the open market. However, TPO arrived at ALP of INR 2039.25 per share, stating that ALP determination must be based on the valuation of USL as an entity and using the Discounted Cash Flow (DCF) method. The taxpayer contested before the Bangalore ITAT that the transaction was not an international transaction as Relay was not its AE on the date of SPA, and Relay acquired 26% stake in USL only after acquiring shares of USL from the stock market.

Held by the ITAT

Bangalore ITAT rejects the taxpayer’s contention and concludes:

• Relay BV held a controlling stake in USL (more than 26%) on 28 November 2013, during the relevant previous year. ITAT adopts a literal interpretation of the provisions of Section 92A(2), which states that “two enterprises shall be deemed to be an AEs if, at any time during the previous year, one enterprise holds, directly or indirectly, shares carrying not less than 26% of the voting power in the other enterprise.”
• Placing reliance on Hon’ble Supreme Court decision in the case of Vodafone - each share represents a vote in the company’s management, which can be utilized to control the company. ITAT concluded that taxpayers and other associates contributed and assisted Relay BV in acquiring controlling interests in USL.
• Reliance was placed on Mumbai ITAT’s decision in the case of Lanxess India that the control premium of 30% to 50% is justifiable in case of acquisition of shares and hence upheld TPO ALP computation.

Our Comments

While dealing with the transfer of shares transactions, all provisions are to be interpreted very carefully and reference should be drawn to the Hon’ble Supreme Court judgment in the case of Vodafone to avoid litigations.

Whether SEZ unit is allowed to claim a refund of unutilized ITC in accordance with Section 54 of the CGST Act, 2017 r/w Rule 89(4) of the CGST Rules, 2017?

SE Forge Ltd vs. Union of India TS-67-HC(GUJ)-2023-GST

Note: In a similar case, the Madras High Court had allowed the refund to the petitioner SEZ unit holding that the statutory scheme for refund admits applications to be filed by any entity that believes it is so entitled, including the petitioner SEZ.

Platinum Holdings Pvt. Ltd. vs. Additional Commissioner of GST and Central Excise TS-527-HC(MAD)-2021-GST

Facts

• The petitioner is an SEZ unit engaged in manufacturing engineering components, tower flanges and bearing rings for the wind energy sector.
• The jurisdictional GST authorities, including the First Appellate Authority, rejected the petitioner’s applications for a refund of utilized Input Tax Credit (ITC) for various periods filed under Section 54 of the CGST Act, 2017, read with Rule 89(4) of the CGST Rules, 2017, on the ground that only the suppliers/ vendors could claim a refund of ITC.
• Hence, the petitioner approached the Gujarat High Court, contending that there is no express denial of refund of output tax or ITC to an SEZ under Section 54. According to the petitioner, the averment that since the supply to SEZ units is zero-rated, the units are not eligible for refund was unsustainable.
• On the other hand, Revenue defended its stand by stating that SEZ is not required to pay taxes to the supplier and that if it has done so, it should then recover the same through an appropriate civil case. It would be an additional burden on the administration to verify whether the supplier has claimed the refund or not and whether the SEZ unit has actually paid the taxes to the supplier.

Ruling

• As per the Court, the issue was squarely covered by the decision in Britannia Industries vs. Union of India, wherein the Bench had rejected Revenue’s stand that SEZ unit is not entitled to seek an ITC refund.
• It rejected Revenue’s attempt to distinguish the aforesaid case basis the stand that the matter therein related to IGST distributed by ISD for services pertaining to SEZ unit as it was not possible for a supplier to file a refund application and that a Special Leave Petitions (SLP) was currently pending before the Supreme Court.
• The High Court also noticed that while claiming the refunds, the petitioner had specified that its suppliers had not claimed any refund, and if any such eventuality was found, it would pay back the amount.
• Accordingly, it quashed the rejection orders and directed the Revenue to grant ITC refund after proper verification and by obtaining a specific undertaking/bond from the petitioner, allowing it to recover the refund with interest if at any point it was found that the supplier had claimed a refund as well.

Our Comments

This decision is yet another instance where the Court has interpreted the legal provisions to find no restriction on the SEZ units to claim refunds of unutilized ITC.

While this decision would further fortify the stand of the SEZ units, a verdict from the Apex Court should finally resolve the litigation on the said subject matter.

Whether pre-paid payment instruments or vouchers themselves or the act of supplying them, are liable to GST?

Premier Sales Promotion Pvt Ltd vs. The Union of India & Ors. TS-23-HC(KAR)-2023-GST

Note: Tamil Nadu AAAR, in the case of Kalyan Jewellers India Ltd [TS-131- AAAR(TN)-2021-GST], has held that ‘Vouchers/Pre-Paid Instruments (PPIs)/ Gift cards’ per se are neither ‘goods’ nor ‘services’ but are “a means/instrument for payment of consideration.”

Facts

• The petitioner trades in pre-paid payment instruments (PPIs) like gift vouchers, cashback vouchers, and e-vouchers for specified face value.
• The petitioner’s clients issue such vouchers to their employees as incentives or to other beneficiaries under promotional schemes for use as consideration for the purchase of goods and/or services.
• Both, the Karnataka Advance Ruling Authority (KAAR) as well as Appellate Advance Ruling Authority (KAAAR) affirmed that the supply of vouchers is taxable at 18% as a supply of goods and the time of supply in all three cases would be governed by Section 12(5) of CGST Act, 2017.
• Aggrieved thereby, the petitioner filed a writ petition before the Karnataka High Court.
• The petitioner relied inter alia on RBI’s Master Circular to submit that since vouchers or PPIs are ‘payment instruments’ that do not disclose goods and services at the time of issuance, the ‘time of supply’ shall be the date of redemption and at best, can only be considered as an ‘actionable claim.’

Ruling

• The definition of ‘voucher’ under Section 2(118) of the CGST Act, 2017 makes it clear that they are mere instruments accepted as consideration for the supply of goods or services. They have no inherent value of their own.
• As vouchers are considered as instruments, they would fall under the definition of ‘money’ which is excluded from the ambit of “goods” and “services,” and therefore, they are not leviable to tax.
• High Court observed that the vouchers are semi-closed PPIs in which the goods or services to be redeemed are not identified at the time of issuance. These PPIs do not permit cash withdrawals, irrespective of whether banks or NBFCs issue them and they can be issued only with prior approval of RBI.
• In substance, the transaction between the petitioner and its clients is the procurement and delivery of printed forms, which are like currency. The value printed on such form can be transacted only at the time of redemption and not at the time of client delivery.
• Therefore, the issuance of vouchers is similar to pre-deposit and not a supply of goods or services.
• Accordingly, the High Court allowed the writ petition and quashed the orders of KAAR and KAAAR while holding that vouchers are exempted from the levy of tax.

Our Comments

With vouchers becoming a popular gifting choice recently, the High Court decision offers much needed clarity on the taxability thereof. This would avoid the possibility of double taxation since the underlying goods or services (which are redeemed through the voucher) already incur GST levy.

However, as the supply of vouchers has been considered exempt from GST, the ITC in relation thereto would become ineligible, thereby inviting reversal if already availed.

Section 79 is inapplicable where the ultimate beneficial shareholding remains unaltered in case of intragroup share transfer

Sodexo India Services Private Limited TS-79-ITAT-2023(Mum)

Mumbai Income Tax Appellate Tribunal (ITAT) has held that even in the event of a change in shareholding by more than 51% due to intra-group share transfer, section 79 does not get triggered unless the beneficial ownership changes. Accordingly, the eligibility to carry forward and set off the losses shall continue.

In the given case, the shareholding was changed due to the transfer of shares between the group companies. However, the control and management of the company remained with the same persons. Observing that the ultimate beneficial shareholders continued to remain the same, the ITAT ruled in favor of the taxpayer.

Furthermore, the ITAT has also observed that since there is no set-off of losses brought forward during the year under consideration, the question of the applicability of Section 79 does not arise.

Our Comments

The applicability of Section 79 in cases of change in immediate shareholding with ultimate shareholding remaining the same has been debatable, with decisions both in favor and against.

While the unfavorable decisions have been taking into consideration the beneficial ownership through voting power, the favorable ones have delved into the object of enacting the said provision. The objective has been that benefit of carry forward and set-off of business losses for previous years of a company should not be misused by any new owner, who may purchase the shares of the company only to get the benefit of set-off of business losses of the previous years, which may bear profits in the subsequent years after the new owner takes over the company. In the context of this objective, in these decisions, the beneficial ownership has been considered to be with the same person where the ultimate shareholder remains the same.

The Tribunal has also upheld the contention of the taxpayer that the provision shall not apply for the year under consideration since there was no set off of tax losses during the year.

MCA allows the physical filling of certain important e-forms in the wake of technical issues on the new V3 MCA-21 Portal

The Ministry of Corporate Affairs has issued a general circular dated 22 February 2023 and informed that all companies intending to file the following forms:

• i. Form GNL-2 (filing of prospectusrelated documents and private placement),
• ii. Form MGT-14 (filing of Resolutions relating to prospectus-related documents, private placement),
• iii. PAS-3 (Allotment of Shares),
• iv. Form SH-8 (letter of offer for buyback of own shares or other securities),
• v. Form SH-9 (Declaration of Solvency) and
• vi. Form SH-11 (Return in respect of buyback of securities)

During the period from 22 February 2023 to 31 March 2023 on the MCA-21 Portal, may file such Forms in physical mode duly signed by the persons concerned as per requirements of the relevant forms, along with a copy thereof in electronic media, with the concerned Registrar without payment of fee and take acknowledgment thereof. Such filing will be accompanied by an undertaking from the company that the company shall also file the relevant Form in electronic form on MCA-21 Portal along with the fee payable as per Companies (Registration Offices and Fees) Rules, 2014 once the issues with the MCA-21 Portal are resolved.

Our Comments

All companies attempting to file regulatory returns and documents had been facing issues with the V3 (version 3) of the MCA-21 Portal after the Ministry transitioned 46 important e-forms to V3 from V2 in January 2023. Furthermore, the Companies Act 2013 restricts certain important corporate actions like buybacks, IPO’s, utilization of Private Placement proceeds, etc., until filling returns on the MCA 21 Portal is completed. Because of this, companies were facing delays in completing these corporate actions. Certain companies also filed petitions requesting MCA to allow the physical filling of forms until all technical glitches on V3 MCA 21 portal are resolved. This decision of the Ministry to permit companies to make certain important filings in physical mode from 22 February 2023 to 31 March 2023 has been welcomed with open arms. However, it is pertinent to note that the Companies are still required to complete the online Form filing on the V3 MCA 21 portal once the technical glitches on the Portal are stabilized.