From The Judiciary

Whether payment made for market research of foreign territory will be considered taxable in India?

M/s Orkla Asia Pacific Pte Ltd vs The DCIT ITA No. 193/Bang/2019

Facts

The taxpayer is a company incorporated in Singapore and is a tax resident of that country. The company is organized as a support and business development center for all Orkla moved companies in the Southeast Asia region. The company rendered advice, support, and assistance in marketing and sales in the Southeast Asia region to Orkla group companies through experienced personnel. The taxpayer has a 100% subsidiary in India, namely MTR Foods Pvt. Ltd., Bangalore, and it also renders such marketing services to the Indian company for the benefit of the Indian company in Southeast Asian country.

MTR Foods Pvt Ltd did not deduct tax on the fees paid to the taxpayer with a view that it does not qualify to be considered as Fees for Technical Services (FTS) under India-Singapore DTAA by virtue of the make available clause. Thus, in the absence of a Permanent Establishment (PE), the fees shall not be taxable in India. The Assessing Officer (AO) passed a draft assessment order by considering the amount paid to the taxpayer as FTS. The DRP upheld the draft assessment order of the AO.

Aggrieved by the order, the taxpayer filed an appeal before the Bangalore Tribunal.

Held

After considering the data on record, the Bangalore tribunal observed that the services rendered by taxpayer were utilized in a business carried on by MTR Foods outside India. Thus, the services rendered by a taxpayer cannot be deemed to have been accrued or arisen in the hands of the taxpayer in India and, accordingly, shall not be taxable in India under the Income Tax Act. Even under the India-Singapore DTAA, income shall not qualify to be considered as FTS by virtue of the make available clause in the treaty.

Our Comments

This is a welcome decision. However, one will have to evaluate the other contrary ruling as well while relying on the argument that the expenses utilized for the development of a business outside India.

Whether the purchase of application software providing enduring benefits should be considered as capital expenditure?

M/s Kotak Mahindra Bank Ltd Vs DCIT. 748/Bang/2011 2001-02, 733/ Bang/2011 2001-02

Facts

The taxpayer is a company engaged in the business of banking. The taxpayer purchased an application software, Core Banking Solution (CBS), for networking 125 bank branches with a centralized processing solution. The taxpayer bank was granted a license to use the 'Profile' and other software solely for processing the bank's data. The bank was granted a 'non-exclusive, non-transferable license' to use the integrated 'Profile' Software system to process a specified number of loan accounts and deposit accounts of the bank's customers. The assessee also incurred expenses towards the purchase of computer systems from IBM. The assessee claimed the expense towards the purchase of software as a revenue expense.

According to the AO, the taxpayer acquired a capital asset that would deliver tangible benefits of an enduring nature and accordingly should be considered capital expenditure.

The Commissioner of Income-tax (Appeals) CIT(A) confirmed the order of the AO. Aggrieved by the order, the taxpayer has raised the aforesaid grounds before the Tribunal.

Held

In order to treat any expenditure as capital expenditure, the same should result in accrual of advantage of enduring benefit and such benefit should accrue to the assesses in the capital field. Such accrual of benefit in the capital field would mean that the said benefit should form part of the profit-making apparatus of the taxpayer’s business. The expenditure in question only facilitates carrying on the business of the taxpayer more profitably without touching the profit making apparatus of the bank which is receiving deposits and lending/investing them for profit. Therefore, the expenditure in question has to be regarded as revenue expenditure.

Our Comments

The Bangalore Tribunal has appreciated the fact that every expense providing enduring benefit shall not be considered as capital expenditure. Enduring a benefit test cannot be an exclusive test for classifying the nature of the expenditure.

In the absence of application of a prescribed method, the ALP cannot be determined as Nil – for shared services & reimbursement of expenses. Documentation is key!

PPG Coatings India Private Limited¹

Facts

The taxpayer was engaged in the trading of paints and had entered into international transactions in the nature of cost sharing expenses and reimbursement of costs. The taxpayer stated that the transactions were at arm’s length being allocations and on a cost-to-cost basis. However, the Transfer Pricing Officer (TPO) alleged that the taxpayer had failed to demonstrate the benefits derived from the payments made and failed to submit the requisite supporting evidences, thereon determined the Arm’s Length Price (ALP) of the transactions to be at “Nil.” The DRP upheld the adjustment proposed by the TPO. Aggrieved, the taxpayer filed an appeal before Income Tax Appellant Tribunal (ITAT).

Held by the ITAT

Without resorting to the methodology of determining ALP as prescribed, the TPO cannot determinate the ALP as NIL by applying the benefit test. Furthermore, ITAT also admonishes lower authorities’ failure to consider various evidences produced by the taxpayer (agreements, email correspondences, allocation key, benefits derived, etc.). Accordingly, the ITAT rejected the NIL determination of ALP for the international transactions under dispute. The ITAT also acknowledges that the taxpayer’s profit margins after considering the international transactions were higher than comparables.

Our Comments

Taxpayers may be advised to maintain a complete trail of documentation, especially in case of payments to Associated Enterprise (AE), to help demonstrate the arm’s length nature of the dealings. While various rulings have upheld that the TPO neither has jurisdiction to question commercial expediency of a transaction nor to examine the necessity of transactions, however in the absence of relevant documentation, it is still seen that the TPOs choose to evaluate benefits derived therefrom.

Penalty u/s 271G, not sustainable without the satisfaction of default u/s 92D – Invocation of 92C invalid for Section 271G

Enhance Ambient Communication Pvt Ltd²

Facts

The taxpayer had filed responses against a notice issued u/s 92CA(2) vide letter stating it had enclosed a compact disc (CD) that included audited financials, the Form No—3CEB, a copy of transfer pricing report, etc. However, the taxpayer had failed to enclose the CD in its submission with the letter. Consequently, the TPO passed an order u/s 92CA(3) and initiated a penalty proceeding u/s 271G noting the taxpayer's failure to furnish a copy of the transfer pricing study report and other details. The Commissioner of Income Tax (Appeals) (CIT(A)) allowed the taxpayer's appeal and deleted the penalty. Aggrieved, the revenue filed an appeal before ITAT.

Held by the ITAT

ITAT holds that issue of the validity of penalty proceedings was the actual subject matter of examination and not delay in compliance with the penalty notice.

ITAT noted that the CIT(A), in his order, had pinpointed that the notice of penalty dated was tilted “Request for submission of documents” for the purpose of Section 92C, and there was no reference to Section 92D (which was the relevant Section of non-compliance/ default for invoking penalty under Section 271G).

Furthermore, ITAT also noted that the CIT(A) had held that the AO’s initiation of penalty u/s 271G was not valid as the same could not be imposed on account of any alleged default under Section 92CA(3) (which stipulated the computation of ALP and procedure for the TPO to be followed in relation to the same) but should have been issued for default under Section 92D;

“when valid satisfaction has not been recorded, and valid notice has not been issued, very initiation of penalty proceedings are not sustainable in the eyes of law.”

Our Comments

The taxpayers should remain vigilant in timely and correct responses to notices issued to them. Furthermore, understanding of the specific Section under which the notice was issued is key, especially when penalty proceedings are initiated.

Whether there is any prohibition in the CGST or SGST Act on the consolidation of multiple investigations being carried out at various jurisdictional levels under one umbrella of zonal DGGI considering a common thread between all the entities?

Indo International Tobacco Ltd. and Anr. vs. Shri Vivek Prasad, Additional Director General, DGGI & Ors. [2022 (1) TMI 554 – Delhi High Court]

Facts and Contentions

• Multiple investigations were initiated by various jurisdictional GST authorities and zonal DGGIs against different entities, including the petitioners, as they all appeared to have a common link involving fake ITC.
• However, the petitioners challenged the issuance of multiple summonses and parallel investigations conducted by various agencies on the ground that the proceedings violated the mandate of Section 6(2)(b) of the CGST Act, 2017 r/w Circular bearing D.O.F. No. CBEC/20/43/01/2017-GST (Pt.) dated 5 October 2018.
• According to the petitioners, since the jurisdictional SGST Commissionerate(s) had initiated the proceedings, no other officer of CGST had the jurisdiction to proceed against them.
• On the other hand, Respondents submitted that to address the petitioners' grievances that multiple agencies were carrying out the investigations, the same was now sought to be centralized at zonal DGGI.

Judgment

• To achieve the goal of harmonized GST structure and in the spirit of cooperative federalism, Section 6(1) of the CGST Act, 2017 and pari materia provisions in the SGST Act, 2017 provide for cross-empowerment of the Central Tax officers and the State Tax officers.
• Section 6 aims to provide protection to the taxpayers against being subjected to multiple agencies for the same set of transactions, at the same time empowering the officers under the CGST Act/the SGST Act/the UTGST Act to pass a comprehensive order and take action keeping in view and extending to the other Acts. There should, therefore, be only one order insofar as the tax entity is concerned.
• While the Circular clarifies that the Central Tax and the State Tax Officers are authorized to initiate 'intelligencebased enforcement action' on the entire taxpayer's base “irrespective of the administrative assignment of the taxpayer to any authority,” it cannot be extended to cover all and myriad situations that may arise in the administration and functioning of the GST structure.
• Neither Section 6 nor the Circular is intended to nor can it be given an overarching effect to cover all the situations that may arise in the GST implementation. They have a limited application to ensure that there is no overlapping exercise of jurisdiction by the Central and the State Tax officers.
• They are also not intended to answer a situation where due to complexity or vastness of the inquiry/proceedings or involvement of a number of taxpayers or otherwise, one authority willingly cedes jurisdiction to the other which also has jurisdiction over such inquiry/proceedings/taxpayers.
• Therefore, both Section 6 and the Circular do not apply to the facts and the circumstances of the present case.
• As there is no prohibition under the CGST Act, the multiple investigations initiated against the petitioners were allowed to be transferred to the zonal Directorate General of GST Intelligence (DGGI) to bring them all under one umbrella.
• Regarding Notification No. 14/2017-Central Tax, it cannot be said that in every such case, the ‘proper officer’ with limited territorial jurisdiction must transfer the investigation to the ‘proper officer’ having pan India jurisdiction. It would depend on the facts of each case as to whether such transfer is warranted or not. To lay down the undefeatable rule in this regard may not be feasible or advisable and certainly not acceptable.

Our Comments

While delivering the judgment, the Hon’ble Delhi High Court has relied on the settled principle of interpretation of the statute that the Court must adopt a construction which will ensure the smooth and harmonious working of the statute and eschew the other, which will lead to absurdity or give rise to practical inconvenience or friction or confusion in the working of the system.

The judgment seeks to clearly bring out the intent of the GST law to bring a harmonious convergence of the States and the Union to tax the same event.

It may be pertinent to note that the issue of jurisdiction vis-à-vis investigations has hitherto been a subject matter of litigation even under the Customs legislation.

i. Whether full ITC can be availed of GST charged on invoices or a proportionate reversal is required in case of post-purchase cash discount for early payment, provided through commercial credit notes?

ii. Whether GST is applicable on cash discount/schemes offered by suppliers through credit notes without GST adjustment?

In re Rajesh Kumar Gupta of M/s. Mahveer Prasad Mohanlal [Order No. 01/2022 dated 6 January 2022 – Madhya Pradesh AAR]

Facts

• The applicant is a wholesale trader of rice and pulses.
• The supplier would offer him a cash discount for early payments as well as target incentives without adjustment of GST.

Ruling

• As per Section 15(3)(b) of the CGST Act, 2017, there are two conditions to satisfy – firstly, discount given after supply of goods shall be in terms of the prior agreement; and secondly, it should be linked to the relevant invoices.
• In the present case, the commercial credit notes issued by the supplier do not satisfy the conditions laid down in Section 15(3)(b) and therefore, the supplier is not eligible to reduce the output tax liability.
• Hence, the applicant, being the recipient, can avail ITC on such supply and no proportionate reversal is required.
• Furthermore, since the amount received in the form of a credit note is actually a discount and not a supply by the applicant to the supplier, no GST is leviable on the recipient on cash discount/incentive schemes offered by the supplier through credit notes against supply, without adjustment of GST.

Our Comments

This ruling is contrary to the verdict of Kerala AAR in the case of Santosh Distributor, wherein it was held that GST is applicable on the amount received by the distributor as reimbursement of discount/rebate from the principal company. This has been upheld by the Kerala Appellate AAR.

This ruling seems to have rightfully negated the logic that amounts received as incentives are to be treated as consideration for the supply of service.

As issuance of commercial credit notes is an industry-wide practice, it would help taxpayers defend their stand against the jurisdictional GST officers.

Mumbai ITAT: Receipt of Shares as Gift not to come under the purview of Section 68 of the Act

Humuza Consultants Vs PCIT [ITA No. 726/Mum/2021 / TS-27- ITAT-2022(Mum)]

Humuza Consultants (assessee) engaged in the business of investment, consultant, received 65.9 million shares of Wockhardt Ltd of the face value of INR 5 each amounting to a total INR 329,488,785/- as a gift from three different companies. The assessee’s case of AY 2015-16 was selected for scrutiny by AO, and a scrutiny order was passed subsequently. The Principal Commissioner of Income Tax (PCIT) invoked its revisionary powers u/s 263 of the Income-tax Act, 1961 (Act) and held that claim of the gift of shares should have been assessed in accordance with: (i) willingness of owner, (ii) acceptance of the gift and (iii) transfer of assets and further held that the condition of proper transfer of asset was not fulfilled; PCIT, thus, directed to make a fresh assessment and to examine the issue of the receipt of the gift of shares in the context of the provisions of Section 68, against which the assessee preferred the appeal before Tribunal.

The Tribunal quashed the exercise of revision for the order passed by the AO by laying down the below observations:

• The provisions of section 68 are inapplicable for the case since Section 68 specifies “any sum” credited and not receipt of shares.
• The shares were received without consideration and accounted in books of the assessee as “Investment” further dividend from such shares was credited to Profit and Loss A/c.
• It dismissed PCIT’s contention that the company cannot make the gift relying on the Mumbai Tribunal decisions in the case of DP World³ and KDA Enterprises⁴, wherein it has been held that the company can give a gift and that such a gift is a capital receipt not taxable under the alleged provisions of the Act. It further observed that Section 56(2)(viia) provides for taxability of receipts of assets without consideration or with inadequate consideration and that there is no bar for a company to give shares as a gift.

Our Comments

The decision provides a couple of key observations. The first is the nonapplicability of Section 68 on the gift of shares in the hands of the recipient as the said provision applies to the credit of any sum in the books and not to receipt of shares. Secondly, the decision has affirmed the principle that the company can also give a gift of shares and that there is no bar on the company to do so.

Hyderabad ITAT: Alternative differential addition u/s 68 not tenable once addition made u/s 56(2)(viib) stands deleted

Autozilla Solutions Pvt. Ltd vs Income-tax Officer [ITA No. 1568/Hyd/2019 / TS-27-ITAT- 2022(Mum)]

The company(assessee), engaged in the business of automobiles and auto parts, was subjected to scrutiny assessment for AY 2016-17, whereby the addition of INR 7.991 million was made under Section 68 of the Act. Alternatively, applying provisions of Section 56(2) (viib), an addition of INR 7.972 million was made.

Aggrieved by the order, an appeal was preferred before CIT(A), who deleted the addition of INR 7,972,460 u/s 56(2) (viib) by holding that the Discounted Cash Flow (DCF) method followed by the assessee is correct. However, the addition made under Section 68 was not adjudicated by him. Thus, the appeal was preferred before the Tribunal.

Hyderabad ITAT allowed the assessee’s appeal by holding that once the addition of share capital u/s 56(2)(viib) is set aside, sustaining any addition u/s 68 is not tenable. Also, it observed that once an addition was made under one provision, the same addition could not be made under another Section.

Our Comments

It is observed that during the course of the assessment proceedings, additions are invariably proposed under both the above-discussed provisions in case of issuance of shares. This could be from the perspective that in case addition under one provision stands deleted, the other provision still holds ground. In such a scenario, the observation of this decision that once addition stands deleted under one provision, the addition cannot be sustained under other provision as well is expected to come as a relief to the taxpayers.