From The Judiciary

Whether a Liaison Office would constitute a Permanent Establishment where employees conduct preparatory or auxiliary coordination?

S.R. Technics Switzerland Limited TS-1018-ITAT-2022(Mum)

Facts

The taxpayer is a foreign company incorporated in Switzerland and is engaged in the maintenance, repair, and overhaul business for aircrafts, engines, and components. The assessee also has a Liaison Office (LO) in India, which was established with RBI’s approval for communication/coordination functions. The Revenue alleged that the LO in India constituted a Service Permanent Establishment (PE) or an Agency PE; accordingly, a certain portion of its income was alleged to be attributable to the Indian PE.

It was contended by the taxpayer that there is no PE in India as the LO is functioning strictly under the RBI directions and is engaged in only coordination functions, which are of preparatory/auxiliary nature. An appeal was filed with the Tribunal after not receiving relief from the Department.

Held

The Tribunal agreed with the taxpayer’s contention. The LO did not carry out any activities which were beyond what was permitted by the RBI, i.e., it was not engaged in any business or trading and was just a part of the coordination and communication functions. Thus, it was held that the activities carried out by the LO are preparatory(auxiliary) in nature, which is under the specific exclusions provided under Article 5 of the India- Switzerland tax treaty. Furthermore, it was also observed that the employees of the LO do not negotiate, finalize or discuss the mechanics of contracts, including pricing, with the assessee’s customers, and as such, the employees of LO merely act as a communication link between the assessee and the airline companies.

Our Comments

The Mumbai Bench of the Tribunal held that the LO was only conducting preparatory and auxiliary functions of communication and coordination.

Whether IT and admin services provided to AE would constitute FTS despite of make available clause?

Bio Rad Laboratories Inc. TS-1009-ITAT-2022(DEL)

Facts

Bio Rad Laboratories Inc. is incorporated under USA laws and is engaged in manufacturing and supplying life science research, healthcare, analytical chemistry systems, etc. It rendered information technology services and some administrative services to its associated enterprise pursuant to a service agreement. The Revenue alleged that these services were in the nature of managerial services provided by the taxpayer to its Indian Associated Enterprise (AE), and such technical knowledge, experience, skill, knowhow, etc., were ‘made available’ by the taxpayer to its Indian affiliate and, therefore, they are in the nature of FTS being liable to tax at 10% under the India-USA tax treaty.

Held

The Tribunal ruled that in order to bring the managerial services within the ambit of FTS, the said services would have to satisfy the ‘make available’ test, and such services should enable the person acquiring the services to apply the technology contained therein.

The Tribunal further observed that it is evident that Indian AE is not enabled to provide the same services without recourse to the taxpayer, and mere incidental advantage to Indian AE is not enough to satisfy the ‘make available’ test. It was opined that the real test is the transfer of technology, which the Revenue failed to consider. The following observation was made by the Tribunal “in order to invoke make available clauses, technical knowledge and skill must remain with the person receiving the services even after the particular contract comes to an end….”

Our Comments

The Delhi Bench of the Tribunal concluded that to invoke ‘make available’ provision, the technical knowledge and skill must remain with the person receiving the services even after the service ends.

Can the valuation of shares, where the future cash flow projections are uncertain, be valued as per the DCF method?

Aaradhana Realties Limited (earlier known as Essar Investment Limited)¹ TS-899-ITAT-2022(Mum)-TP

Facts

The taxpayer has sold equity shares of Essar Capital Limited to its AE, i.e., Essar Capital Holdings Limited, Mauritius. The taxpayer has benchmarked the transaction using the external Comparable Uncontrolled Price (CUP) method basis the valuation certificate from the external valuer. However, the Transfer Pricing Officer (TPO) recomputed the arm’s length value of the shares using Discounted Cash Flow (DCF) method as per actual published figures and proposed an adjustment. The view of the TPO was upheld by the Dispute Resolution Panel (DRP).

Held by ITAT

IThe Income Tax Appellate Tribunal (ITAT) noted that Essar Capital Limited had an inconsistent revenue/cash flow stream over the years. Placing reliance on the valuation norms prescribed by the Indian Valuation standard 2018 issued by the Institute of Chartered Accountants of India (ICAI) it upheld the taxpayer’s view that the DCF method cannot be applied in the instant case. The ITAT also relied on the case of Tally Solutions (P.) Ltd² to state that the projections should be adopted during valuation rather than placing reliance on actual figures.

Furthermore, the ITAT also commented that when the TPO was computing the arm’s length value of the shares using the discounted cash flow method, it considered interest income but neglected the interest payments, which were in the nature of operating expenses since it was an investment company.

Our Comments

In the valuation of shares, instead of always considering the income approach, it has been recommended that the use of other valuation approaches can be adopted. This is especially so in cases where there is significant uncertainty in the timing of income, i.e., future cash flows. It also acknowledges that Indian valuation standards 2018 issued by ICAI are the basis for the valuation of shares.

Internal comparables are to be selected over external comparables for Interest Benchmarking on NCDs

Dans Energy Private Limited³ TS-906-ITAT-2022(Bang)-TP

Facts

The taxpayer was involved in identifying and investing in hydropower projects. The taxpayer had issued non-convertible unsecured, redeemable debentures (NCDs) to its AE. These debentures were on a private placement basis and were unlisted and unrated. The taxpayer had paid interest on these debentures at SBI rate + 5% subject to a maximum of 15%, which is effectively the same at 14.27% (for AY 17-18) and 13.93% (for AY 18-19). The taxpayer benchmarked the interest by adopting the following approaches:

• chose external comparables, which had issued NCDs during each of the relevant periods, which was bearing interest at 15%.
• chose internal comparables of interest paid on secured loans availed by the taxpayer from unrelated parties, which came to a rate of 13.75%. However, since the loans were secured in nature, an adjustment was made to arrive at the arm’s length interest rate, which came to 16.75% (for AY 17-18) and 18.39% (for AY 18-19).

During the assessment proceedings, the TPO rejected the benchmarking analysis conducted by the taxpayer and proceeded to choose comparables identified by searching the Bloomberg database. Few of these comparables included government companies with AAA credit ratings. The TPO determined the Arm’s Length Price (ALP) at 10% for both assessment years and proposed an adjustment. The DRP upheld the order of the TPO.

Held by the ITAT

ITAT held that internal comparables should be evaluated first for ALP computation – placing reliance on the judgment of Tecnimont ICE Pvt Ltd. It further stated that external comparables can be adopted only if internal comparables fail the comparability test. Additionally, the ITAT noted that the ALP of interest will depend on various factors like:

• nature of the loan,
• purpose of the loan,
• currency in which the loan is provided and in which interest is to be paid,
• security or guarantees offered by the borrower,
• the amount and duration of the loan and
• credit rating of the borrower.

In the instant case, the ITAT noted that the NCD issued to AE was unsecured in nature and loans taken from third parties are secured loans; therefore, internal comparables should be adopted after adjusting to the difference in security. It further adds that if there is a difference in the currency, appropriate adjustments should be made. While the ITAT observed that there is no clarity on whether the NCD issued to AE is denominated in Indian rupees and remitted the matter for verification of the same. However, it held if the loan taken from AE and the loan taken from third parties is denominated in Indian rupees and the interest on such loans is also paid in Indian rupees, the issue related to geographical difference does not arise. In the context of comparability, the ITAT also added that the credit rating of borrowers from the external comparison should be the same as the taxpayer. In the instant case, the taxpayer had incurred losses and comparables selected by the TPO included certain companies with higher credit ratings and which were convertible in nature, which would fetch a lower rate of interest. Hence restored the matter back to the TPO to undertake fresh benchmarking to determine the ALP of interest on NCD’s keeping the above points in mind.

Our Comments

In the case of financial transactions also, internal comparability is to be preferred over external comparables. Even if there are any differences – appropriate adjustments in relation to the currency and difference in security may be made. Furthermore, it is imperative to understand key characteristics of such financial transactions as currency, the borrower's credit rating, security, etc.

Whether the recipient could claim ITC beyond the statutory limit where the supplier had erred in disclosing the GSTIN in its invoices as well as GST returns?

Circular No. 183/15/2022-GST provides clarification to deal with differences in ITC availed in Form GSTR-3B as compared to that detailed in Form GSTR-2A for FY 2017-18 and 2018-19

Wipro Ltd India vs. The Assistant Commissioner of Central Taxes and Ors. TS-02-HC(KAR)-2023-GST

Facts

• During the period FY 2017-18 to FY 2019-20, Wipro Limited had inadvertently disclosed the wrong GSTIN in the invoices while making supplies to ABB Global Industries and Services Pvt. Ltd., which was carried forward in the relevant GST returns.
• Consequently, the supplier-petitioner approached the Karnataka HC seeking a direction to allow them access to the GST portal to rectify their Form GSTR-1 so that the recipient could take Input Tax Credit (ITC) in respect of the subject invoices, despite the time limit prescribed in Section 16(4) of the CGST Act, 2017.
• The supplier-petitioner placed reliance on Circular No. 183/15/2022- GST dated 27 December 2022, to substantiate their stand.

Ruling

• HC noticed that the language employed in the Circular contemplates rectifying the bona fide and inadvertent mistakes committed by the persons at the time of filing of Forms and submission of returns during FY 2017-18 and FY 2018-19.
• Hence, considering the peculiar and special facts and circumstances in the present case, HC opined that the error committed by the supplier-petitioner in showing the wrong GSTIN in the invoices and ensuing GST returns was clearly a bona fide error that occurred due to unavoidable circumstances, sufficient cause and consequently, the aforesaid Circular was squarely applicable in the instant case.
• Moreover, HC observed that the procedure prescribed in the Circular was complied with by the parties and therefore directed the Revenue to follow the prescribed procedure.
• HC emphasized that though the Circular refers only to the years 2017- 18 and 2018-19, a justice-oriented approach should be adopted since there are identical errors committed in the year 2019-20.

Our Comments

This order rightly adopts a ‘justiceoriented’ approach to extend the benefit of the guidelines prescribed by the Central Board of Indirect Taxes and Customs (CBIC) beyond the contemplated period.

With an increase in scrutiny and audits by the Department, this ruling and the Circular have come as a respite for the taxpayers.

Assessment order passed in the name of non-existing entity held to be null and void-ab-initio

Barclays Global Service Centre Private Limited (Formerly: Barclays Shared Services Pvt. Ltd.) TS-29-ITAT-2023(PUN)

In a recent decision, the Pune ITAT upheld that any order passed by the assessing officer in the name of a nonexisting company is null and void-abinitio.

Pursuant to amalgamation, any assessment proceeding will be carried out against the amalgamated entity as the amalgamating company ceases to exist. The Tribunal noted that the fact of amalgamation was brought to the notice of the Assessing Officer (AO) and despite knowing the fact, the AO passed the assessment order in the name of the amalgamating company. In this regard, it relied on the decision of the Hon’ble Supreme Court in the case of Maruti Suzuki India Ltd.⁴

Our Comments

This decision reiterates the settled position that upon a merger, the existence of amalgamating company comes to an end and no further proceeding shall be carried out where the fact of the merger is brought to the notice of Revenue. In another Supreme Court decision⁵, where the fact of the merger was not brought to the notice of the AO, the validity of the assessment proceeding in the name of the amalgamating company was upheld.

On perusal of the decisions, it can be noted that the critical factor for deciding the validity of the assessment order is whether the taxpayer has intimated the fact of the merger to the tax authorities. This is an important aspect to be noted by the taxpayers contemplating or undergoing merger exercises. Furthermore, due disclosures should be made in the communications to the tax authorities, return forms, other income tax filings, etc., about the merger.

Introduction of goodwill with credit to current accounts of partners of LLP post-conversion of the company into LLP does not vitiate exemption conditions

[2023] 146 taxmann.com 109 (Mumbai - Trib.)

The ITAT has held that exemption under Section 47(xiiib) applicable on the conversion of a company into LLP can’t be withdrawn on the introduction of goodwill with credit to current accounts of partners of LLP on the admission of new partner post-conversion of private company into an LLP.

Of the conditions to be satisfied for the availability of an exemption, one is that no direct or indirect benefit should be passed on to the shareholders in any form or manner other than by way of share of profit and capital contribution in the LLP. Another condition is that no amount be paid directly or indirectly to any of the partners out of the balance of accumulated profits standing in the company accounts on the date of conversion for a period of three years.

The ITAT held that the introduction of goodwill in books of LLP postconversion by credit to partners' current accounts does not amount to receipt by the shareholders of any consideration or benefit as this condition has to be seen till the date they are shareholders, i.e., date of conversion and based on the factual matrix, there was no such benefit received by shareholders directly or indirectly. Furthermore, this also cannot be considered as a distribution out of accumulated profits on the date of conversion, as the accumulated profits on the date of conversion did not include the amount of goodwill.

Our Comments

It has been a settled position that transfers made under family arrangement do not tantamount to ‘transfer’ within the meaning of Section 2(47) of the Act for capital gains tax to apply. In cases where corporates are involved in the arrangement, the taxability has been litigious considering corporate entities have separate legal existence and are not part of a family. There have been decisions, including that of the jurisdictional Bombay High Court in case of B. A Mohota wherein it has held transfers involving corporate entities to be taxable transfers.

Interestingly, the said decision has been distinguished by the Tribunal on the ground that in the said case, the taxability under consideration was of the company, whereas in the present case, it is of the family member. This is an interesting proposition and it would be worthwhile to see the view other courts adopt, considering the Bombay High Court’s ruling.

SEBI extends relaxation on dispatching hard copies of financial statements

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) mandates Equity as well as Debt Listed Companies to dispatch a hard copy of the statement containing salient features of all the documents as prescribed in Section 136 of the Companies Act, 2013 (financial statements, Board’s report, Auditor’s report, etc.), to those shareholders who have not registered their email addresses. However, relaxation was provided from this requirement during the outbreak of COVID-19. The said relaxation was initially provided till 31 December 2021 and was subsequently extended upto 31 December 2022.

Now, after considering representations from listed entities, SEBI has decided to further extend these relaxations until 30 September 2023. SEBI extension comes after the Ministry of Corporate Affairs (MCA) has also provided similar relaxations to companies dispatching physical copies of financial statements to shareholders through a circular on 28 December 2022.

However, Listed Companies will still be required to send hard copies of annual reports to those shareholders who request the same. SEBI also requires companies to disclose the weblink to the annual report in the notice of AGM published by advertisement to enable shareholders to access the full annual report.

Our Comments

Relaxations brought in by MCA and SEBI during the pandemic, like allowing the dispatch of financial statements, Board’s report, Auditor’s report, etc., in electronic mode, has been accepted as a new normal by all the stakeholders because of its convenience, environment friendliness and costeffectiveness. Extension of this COVID time relaxation will reduce the administrative and compliance burden of listed entitles to a great extent and has been welcomed with open arms.