From The Judiciary

Can profits be attributed to a fixed place PE in India, given the group has incurred losses in the relevant financial year?

Hyatt International-Southwest Asia Ltd TS-812-HC-2023(DEL)

Facts

The assessee, Hyatt International Southwest Asia Ltd., is a UAE-based company engaged in the hotel business. The assessee filed a NIL return of income claiming that it did not have any Permanent Establishment (PE) as there was no branch or liaison office in India. Further, the presence of the assessee’s employees in India did not exceed a period of nine months. Thus, there was no PE under Article 5(2) as well. Consequently, business income was not taxable as per Article 7.

The Assessing Officer (AO) held that the assessee has a PE in India as it is operating hotels belonging to the owners in each and every manner.

On appeal, the tribunal also agreed that the assessee has a PE in India, relying on the SC’s judgment in the case of Formula One World Championship Limited. v. Commissioner of Income Tax, International Taxation-3, Delhi & Anr and directed for attribution. Aggrieved by the findings of the Income Tax Appellate Tribunal (ITAT), the assessee appealed before the Delhi HC.

Held

HC observed that senior employees of the assessee visited India, and they exercised supervisory control. Furthermore, the assessee was not prevented from managing other hotels while stationed at the Hotel premises. Thus, HC held that the assessee has a Fixed Place PE from which it carried on its business.

HC noted that legal and exclusive control is unnecessary for a fixed-place PE. However, only sufficient control for carrying on business would be enough to construe it as available at the disposal of the assessee. HC noted that since the assessee was responsible for the entire management of the Hotel, including the deputation of employees without any recourse to Hyatt India or the owner, it was confirmed that the Hotel premises were at the assessee’s disposal. Thus, upheld ITAT finding on assessee having a fixed place PE.

Furthermore, HC referred the question of the applicability of Article 7(1) of the DTAA to a larger bench, whether Article 7(1) is applicable to the assessee, considering the fact that it has incurred losses in the relevant financial years. HC also observed that ‘profits attributable to the assessee’s PE in India are required to be determined on the footing that the PE is an independent taxable entity. It is, thus, possible that an assessee makes a net loss at an entity level on account of losses suffered in other jurisdictions, which is partly offset by profits arising from India. In these circumstances, if it is held that the assessee has a PE in India, prima facie the assessee would be liable to pay tax on the income attributable to its PE in India notwithstanding the losses suffered in other jurisdictions.’

Our Comments

It is notable that the Court emphasizes the necessity to calculate profits linked to the assessee's PE in India as if the PE were an autonomous taxable entity. This underscores the importance of treating the PE as a distinct entity for tax assessment purposes.

What are the implications for assessment orders issued without a Document Identification Number (DIN)?

Brandix Mauritius Holdings Ltd TS-184-HC-2023(DEL)

The Hon'ble SC stayed the Delhi HC judgment and ITAT ruling in the case of Brandix Mauritius Holdings Limited, which enforced Revenue to follow CBDT Circular No. 19/2019 (the Circular), orally by observing that the absence of Document Identification Number (DIN) in assessment orders is at best 'irregularity' not 'illegality. SC also questioned, "Can assessment go without DIN? What was the position prior to DIN? Quashing the assessments is too severe a consequence, if the assessment goes without DIN, will there be a vacuum?

In this regard, SC issues notice and grants a stay on Delhi HC judgment and ITAT order until further orders.

Our Comments

This case highlights the critical importance of procedural adherence in tax assessments. As the Delhi HC and ITAT orders are stayed, taxpayers shall have to await further instructions on these cases before claiming that an order is non-est due to no mention of DIN.

Benefits derived by the assessee should be considered in case of interest-free loans advanced to AE

Rubamim Limited ITA Nos. 1738 to 1740/AHD/2019

Facts

In AY 2006-07, the assessee (engaged in the business of manufacturing cobalt, copper, and nickel) advanced an interest-free loan to its Associate Enterprises (AE) in the UAE. The TPO for AYs 2006-07 to 2008-09 made an upward adjustment by adopting the CUP method and calculating interest on such loans at LIBOR + 2%. Commissioner of Income-tax (Appeals) [CIT(A)] confirmed the upward adjustment. Aggrieved by the order, the assessee appealed to the ITAT. In its defense, the assessee had stated the following:

• The loan transaction is in the nature of commercial expediency to help the operation of the subsidiary in order to make assured supply of raw materials.
• By not charging any interest, the assessee was able to procure raw materials from the AE at a lower price which was more beneficial than the interest.
• The assessee had also obtained specific approval from the RBI to advance an interest-free loan.
• The assessee had entered into various other transactions with the same AE, which, along with the loan transaction, were inextricably interlinked and needed to be aggregated for benchmarking using the TNMM method since the cost of the loan transaction and the interest cost in such transaction/ purchases has already been inbuilt.
• The assessee also stated that the CUP method cannot be adopted since adequate comparables would not be available in the market for such transactions.

The TPO rejected the contention of the assessment, stating that while calculating the profit level indicator (PLI) using the TNMM method, the finance cost is usually considered nonoperating in nature, and hence, the loan transaction cannot be aggregated with the rest of the transactions.

Held by the ITAT

By relying on the Organisation for Economic Co-operation and Development (OECD) Commentary and various judicial precedents, the ITAT enumerated instances wherein it is appropriate to aggregate international transactions for benchmarking purposes. The ITAT also highlighted that intentional set-offs could occur between AEs with respect to controlled transactions wherein when one enterprise provides benefit to another enterprise within the group that is balanced to some degree by different benefits received from that enterprise in return.

ITAT held that such a huge import of raw materials from the AE would not have been possible unless the assessee had incorporated a company in the UAE. Hence, the transaction of the interestfree loan cannot be viewed without considering the benefit derived by the assessee from its AE. Additionally, the interest cost appears negligible when analyzing the notional interest added by the TPO with the benefit derived by the assessee. Accordingly, the ITAT deleted the TP adjustment for all AYs.

Our Comments

Interest-free loans extended to related parties necessitate thorough examination to validate adherence to economic principles, substantiated by comprehensive documentation highlighting the accrued benefits.

CBDT Instruction No. 03/2016 mandatory for AO; ITAT upholds order passed by PCIT under Section 263

Tokai Rika Minda India Private Limited ITA No. 781/Bang/2023

Facts

In relation to the order passed by the AO for AY 2018-19, the PCIT (Principal Commissioner of Income Tax) passed an order under Section 263 to set aside the AO’s order as erroneous and prejudicial to the Revenue’s interests as the AO had not followed the CBDT Instruction No. 03/2016 for making a reference to the TPO. However, the statutory time limit to pass the TP order had expired when the revisionary order was passed. The assesse appealed against the revisionary order, stating that the order was passed only because AO did not refer the matter within the prescribed time limit for completion of the TP Order under Section 92CA. Thus, powers of Section 263 were invoked only to extend the statutory time limit given to the AO/TPO in completing the assessment. The assessee presented the following arguments backed by various judicial precedents:

• This was not a case of non-reference made by the AO to the TPO but a case of invalid reference made to the TPO beyond the statutory time limit, which rendered the assessment order non-est in the eyes of law, which cannot be revised under Section 263.
• The revisionary order was passed only to cover up the negligence of the AO in performing his duties within the statutory time limit, which is not within the scope of Section 263, making it an illegal exercise of power.

The Departmental Representative stated that the AO is bound by the CBDT Instruction to refer to the TPO to make TP adjustment; hence, there was no error in invoking the provisions of Section 263.

Held by the ITAT

ITAT noted that the instructions issued by the CBDT were mandatory, and by not making a timely reference to the TPO, the AO had breached the mandatory instructions. This view was also upheld by the SC in its ruling in the case of S.G. Asia Holdings India Pvt. Ltd. Hence, the ITAT upheld PCIT’s invoking of jurisdiction under Section 263 and setting aside of the AO’s order for the specific purpose of referring the matter to the TPO.

Our Comments

In cases where reference has erroneously not been made up until the deadline to pass the TP Order and where such an error is prejudicial to the interests of the Revenue, PCIT under Section 263 has the power to set aside the AO order and direct conducting of a fresh assessment so that a reference can be made to the TPO.

Whether interest is payable vis-àvis delayed GSTR-3B filing even though GST liability is deposited in the Electronic Cash Ledger (ECL) within the due date?

Eicher Motors Limited vs. The Superintendent of GST & Central Excise and Anr. TS-19-HC(MAD)-2024-GST

Facts

• Two writ petitions were filed before the Madras HC challenging a recovery notice and an order confirming the demand of interest.
• The petitioner had an accumulated CENVAT Credit to be transitioned into the GST regime. However, owing to technical glitches, the TRAN-1 form was filed belatedly.
• Owing to this delay, the petitioner could not file the monthly GSTR-3B returns for the period July 2017 to December 2017 within the prescribed due dates. However, the tax dues were fully paid through GST PMT -06 challan within the prescribed due date as per GST law.
• The petitioner submitted that the taxes were duly paid within the due date of filing the returns, and accordingly, interest could not be demanded as a result of the delayed return filing.
• On the other hand, the Revenue contended that the taxes paid through challan are only ‘deposits’ and the government receives the money only when the return is filed. Thus, according to the Revenue, interest was liable to be demanded for delayed filing of return, although the taxes were credited in ECL within the due dates.

Ruling

• HC noted that crediting of funds to the government account will invariably take place no later than the last date for submitting monthly returns, as outlined in Section 39(7) of the CGST Act.
• As per the Court, it is immaterial whether the GSTR-3B return is filed within the due date or not for remittance of tax to the government account.
• HC further held that mere default on the part of the petitioner in filing their GSTR-3B cannot postpone the utilization of the tax amount so deposited by the government.
• It observed, “no interpretation can be made as held in the judgment of the Hon'ble Division Bench of Jharkhand HC rendered in RSB Transmission case (referred supra) stating that no payment of tax can be made until the filing of GSTR-3B, which is against the provisions of Section 39(1) and 39(7) of the Act and thus, the said finding would render disastrous consequences in utilization of GST collections by the exchequers.”
• The Court observed that the ‘prescribed date’ mentioned in Section 50(1) of the CGST Act refers to the last date for payment of GST in terms of the provisions of Section 39(7).
• Consequently, HC held that as long as the GST collected by a registered person is credited to the account of the government not later than the last date for filing the monthly returns, to that extent, the tax liability of such registered person will be discharged from the date when the amount was credited to the account of the government.
• Furthermore, if there is any default in payment of GST even subsequent to the due date for filing the monthly returns, i.e., on or before the 20th of every succeeding month, for the said delayed period alone, a registered person is liable to pay interest in terms of Section 50(1) of the Act.
• Resultantly, HC refused to follow the law laid down by Jharkhand HC in RSB Transmission (India) Ltd vs Union of India [MANU/JH/1260] and by Telangana HC in Megha Engineering and Infrastructures Limited vs. CCT [MANU/TL/41/2019], as they were not in line with the provisions of the Act and Rules made thereunder.

Our Comments

While the present judgment would help taxpayers facing similar interest recovery proceedings to fortify their defense, it may be prudent for the Apex Court to provide finality to this issue considering the contradictory judgments of the High Courts.

The Jharkhand HC in RSB Transmission and Telangana HC in Megha Engineering has ruled against the taxpayers. In contrast, Gujarat HC in Vishnu Aroma Pouching Pvt Ltd vs. Union of India [2020 (38) GSTL 289 (Guj)] has taken a view similar to that of Madras HC.