From The Judiciary

Whether pre-clinical lab services fall under FTS and whether ‘make available’ benefit can be claimed under the treaty?

Charles River Laboratories Inc TS-296-ITAT-2023(Bang)

Facts

The taxpayer is a tax resident of the USA, and a Tax Residency Certificate (TRC) has been issued to it. It is in the business of providing pre-clinical laboratory services to enable the determination of a safe dose and assess the potential toxicity of new drugs. These pre-clinical services are provided through reports containing a generic protocol of the test procedure and results to conclude the testing phase.

The Revenue contended that the taxpayer provides a report to the companies in India, which would involve the technical expertise of the taxpayer and accordingly, it would be taxed in India as Fees for Technical Services (FTS).

The taxpayer contended that while the services qualify as FTS under the Income-tax Act( the Act), the Revenue has not appreciated the true impact of the word ‘make available’ used in the treaty while arriving at a conclusion. Test reports generated do not transfer any technology knowledge to the customers, nor do they grant any right to access or use.

Held

The Bangalore Tribunal discussed that make available would only be satisfied when the service recipient can independently provide/transfer the skill or knowledge after it is acquired from the service provider. In the given case, the Tribunal held that the taxpayer has complete knowledge and know-how/ expertise to carry out the research and to issue reports, and this knowledge has not been transferred to its customers. Accordingly, it would not satisfy the make available clause under the tax treaty. The Tribunal also relied upon the decision of the Hyderabad Tribunal wherein Dr. Reddy’s Laboratories Ltd entered a similar transaction. In that case, it was held that such services are not to be considered as FTS.

Our Comments

The ‘make available’ clause under the tax treaty would involve careful consideration on whether an assessee would be eligible for claiming the benefit or not. In this case, Bangalore Tribunal has denied that the services provided do not ‘make available’ technical know-how.

Whether payment made by the Indian company to its sister concern would be taxable in India in case no element of profit is involved in it?

Trusted Aerospace Engineering Pvt. Ltd TS-324-ITAT-2023(CHNY)

Facts

The taxpayer (TASE India) is engaged in the business of manufacturing. TASE India entered into a project agreement with Hamilton Sundstrand Corporation, USA (Hamilton USA) for manufacturing products for their new engine program. As per the agreement, Hamilton USA is responsible for the design of the product, which will be provided to TASE India, and TASE India will manufacture it and provide after-sales support services to Hamilton USA.

TASE India, as an entity, is not equipped with the necessary parts/components to manufacture the product. TASE India outsourced the manufacturing to its sister concern TASE USA. TASE India would then make payment to TASE USA for manufacturing the product.

The Revenue was of the contention that the design that was being developed in the USA was supposed to be used in India. Since the design was to be used in India, income earned by the Non- Resident (NR) Company is taxable in India.

Hence, provisions of Tax Deducted at Source (TDS) are attracted, and TDS should be withheld in India, consequent to which disallowance was made under Section 40(a)(ia) of the Act.

The taxpayer contended that the amount remitted has no income element involved and has been paid to the NR company, which has no Permanent Establishment (PE) in India, and since the expenses were incurred outside India for the manufacture of design, etc., for sale outside India, no TDS is required to be deducted under Section 195.

Held

The Chennai tribunal held that the Commissioner of Income Tax (Appeals) [CIT(A)] has rightly held that Section 195 applies only when the payment made to the NR has an element of income embedded in it. If the sum paid or credited is not chargeable to tax, then the obligation to deduct tax does not arise. It has also relied upon the decision of Hon’ble Supreme Court in the case of GE India Technologies Pvt. Ltd. Vs. CIT wherein it was held that when a remittance is made to a NR, an obligation to deduct tax at source under Section 195 of the Act does not arise immediately. It arises only when such remittance is a sum chargeable to tax under the Income Tax Act under Sections 4, 5, and 9 of the Act.

Our Comments

The Chennai ITAT upheld the decision of CIT(A) and relied on the decision of the Hon’ble Supreme Court in the case of GE India Technologies Pvt. Ltd. Vs. CIT, where it has held that if no income element has been involved in payment made to NR, no income will accrue/ arise in India and accordingly no need to withhold tax as per Section 195.

Whether taxpayer can resile from the method used for the determination of Arms Length Price (ALP) during the course of assessment proceedings?

Star India Private Limited ITA No. 7872/MUM/2019

Facts

The taxpayer engaged in the business of broadcasting and distribution of various satellite channels entered into a Master Rights Agreement (MRA) with its associated enterprise (AE) to purchase a Bundle of Sports Broadcasting Rights (BSB). The said BSB was purchased by the AE for lumpsum consideration from various Independent Sports Bodies (ISBs) in erstwhile years. However, the same was transferred to the taxpayer on a novation basis (75%) and the balance (25%) was sub-licensed. Overall, the BSBs were purchased at a discount of 9.5% (from the AE) vis-à-vis the value paid by the AE to the ISBs. The taxpayer claimed a deduction of INR 3,075 (approximate) for such purchases. It was determined to be at ALP using Other Method (OM) as the most appropriate method (MAM) basis the value determined by the independent valuer using Discounted Cash flow (DCF) method.

The Transfer Pricing Officer (TPO), in the case of the taxpayer for the preceding assessment year, had disregarded the valuation report on the grounds of the projections used in the valuation being inflated and also assigned the terminal value in the valuation to be nil. Considering the facts of the case being akin to last year, the TPO made an adjustment of INR 20.31 billion for the year under consideration. During the assessment proceedings, the taxpayer changed the MAM to Comparable Uncontrolled Price (CUP) method stating that the amount paid by the taxpayer to AE is lesser than the amount paid by AE to third parties.

The Income Tax Appellate Tribunal (ITAT) disagreed with the predecessor bench, which decided the earlier year (AY 2014-15), thereby, a Special Bench (SB) was constituted.

Issues before the SB and SB Ruling

• Can taxpayers resile from the MAM adopted in the TP study - SB held that taxpayers may resile from the MAM selected in the Transfer Pricing Study Report (TPSR). However, the onus of proving whether the new method substantiates the ALP is on the party that resiles from the originally selected MAM.
• Which is the MAM - The SB highlighted the critical differences between the application of the CUP method and OM and stated that the CUP method emphasizes the actual price paid for the property transferred, unlike OM considers the price which has been paid or would have been paid for same or similar uncontrolled transactions. Thus, while selecting OM as the MAM, quotations and valuation reports assist in determining the ALP of the underlying transaction. Also, in order to apply for CUP, there has to be a comparable uncontrolled transaction with an independent party. In the instant case, the price paid by the AE to ISB cannot be construed as a comparable transaction to the purchase consideration paid by the taxpayer to the AE. Thus, the SB held that in the absence of CUP only method that can be applied as MAM is OM.
• Determination of ALP - The matter was directed to be placed before the Division Bench using OM as MAM.

The ruling provides respite to the taxpayers wherein they may resile from the MAM selected at the time of concluding the TP study report at a later point during the course of assessment proceedings.

Projections not to be substituted with actuals

TPG Growth II Markets Pte Ltd ITA No. 1387/MUM/2022

The taxpayer entered into a share purchase agreement with its AE to acquire the investment, viz., shares (held by the AE) in Sutures India Private Limited (SIPL) and Quality Needles Private Limited (QNPL). The taxpayer sold equity shares of QNPL to SIPL. The price per share (for purchase and sale) for the said arrangement was determined basis valuation report using DCF method. The taxpayer benchmarked the purchase transaction using OM and determined the sale transaction to be at ALP using CUP method and corroborated using OM.

The TPO replaced the future projections with actual financial results.

• For purchase of shares: The purchase price was higher as compared to the price arrived at as per the revised valuation report prepared by the TPO post replacing the projected figures with actual. The TPO also proposed a downward adjustment in the cost of shares purchased in the subsequent years and construed the excess amount paid by the taxpayer as deemed a loan to its AE and computed notional interest thereon.
• For sale of shares: The amount received by the taxpayer was determined to be less than the ALP. Furthermore, the application of CUP method was rejected on account of timing differences and differences in contractual rights and obligations while buying shares from promoters/ shareholders.

The Dispute Resolution Panel (DRP) provided partial relief by deleting the adjustment for deemed loan and notional interest thereon.

Held by the ITAT

Disregarded the approach adopted by the TPO of substituting future projections with actual cash flows citing that the TPO failed to evaluate the deviation in the projected cash flows vis-à-vis actual financial results as recommended by BEPS Action Plan 8. For the transaction relating to the sale of shares, the ITAT held OM as the MAM and remitted the matter back to the TPO to re-compute the ALP basis DCF valuation.

The ruling emphasizes maintaining robust documentation as a prerequisite while determining the ALP of international transactions. The valuation done as per DCF method or any other method is always applied by considering revenues projections based on the detailed market expectation over the specified period, which cannot be fiddled with at a later point by substituting actuals.

Whether the search, inspection and investigation provisions of GST law were applicable to the SEZ units?

RHC Global Exports Private Limited & Ors. vs. Union of India & Ors. TS-230-HC(GUJ)-2023-GST

Facts

The petitioners, operating as SEZ units, had assailed the jurisdiction of the State Tax authorities to initiate search, inspection, and investigation along with consequential proceedings under the provisions of Section 67 r/w Sections 70 and 73 of the Gujarat GST Act r/w CGST Act.

Such action was initiated based on analytics and intelligence that the petitioners had claimed bogus Input Tax Credit (ITC) vis-à-vis voluminous inward supply (purchases) transactions from fictitious entities, as well as disposed off duty duty-free imported goods into the Department of Treasuries and Accounts (DTA) without invoices.

Referring to the Preamble to the IGST Act and the provisions of SEZ Act, the petitioners argued that they were not subjected to the domain of any State Tax authorities and as such, even if coercive proceedings were initiated, they lacked the sanction of law.

Ruling

Perusing Ssection 22 of the SEZ Act, High Court observed that any officer or agency who that was authorized by the Central Government the Central Government authorized could carry out search, or seizure, or investigation, or inspection in the SEZ or units situated therein. The provision also suggested that the authorized officer of the Central Government was empowered to carry out such a process without any prior approval or intimation. So the moment authorization was reflected, such measure could be undertaken against the SEZ or unit, observed the Court.

Furthermore, Ssection 6 of the Gujarat GST Act also indicated that the respondent authorities were empowered to carry out proceedings in SEZ.

Accordingly, High Court noted that once the Central Government had notified the functions of proper officers, those functions shall also be applicable to be carried out by the officers under CGST Act, and hence, it cannot be said that there was any lack of authority on the part of respondents.

Additionally, the provisions of the IGST Act were applicable to the whole of India, wherein supplies to or by SEZ units would be treated as inter-state supplies. Therefore, the petitioners were under the mistaken belief that once their business was carried out within SEZ, they were outside the purview of the authority of the respondent authorities.

Resultantly, High Court refused to exercise its extraordinary equitable jurisdiction and imposed costs on the petitioners by concluding that these petitions were an attempt to thwart and delay the legal proceedings initiated by the respondents.

Our Comments

In recent times, we have seen that GST authorities have stepped up their vigilance to curb tax evasion. Moreover, the tax authorities have identified registration-linked frauds as one of the key focus areas for tighter scrutiny in FY 2023-24 and are carrying out special investigations.

In this process, the jurisdiction of tax authorities to initiate such actions would be a bone of contention for the taxpayers and the present decision of the Gujarat High Court should put to rest any question on the authority of GST officers to investigate or search the premises of SEZ units, which are otherwise considered to be outside the territory of India.

Whether the State tax authorities were justified in denying the ITC on purchase from a supplier whose registration was cancelled retrospectively?

Gargo Traders vs. The Joint Commissioner, Commercial Taxes (State Tax) & Ors. 2023-VIL-360-CAL

Facts

The State tax officers had denied the ITC and imposed interest and penalty on the ground that the registration of the supplier had already been cancelled with a retrospective effect covering the transaction period.

The petitioner’s appeal was also rejected and therefore, they approached the High Court. It was submitted that the State tax officers had not considered the documents such as the tax invoice cum challan, debit note, e-way bill, and the statement of bank account furnished to prove the genuineness of the transaction.

On the other hand, Revenue contended that the transaction was of November 2018, but the supplier had accepted the cancellation of their registration from October 2018.

Ruling

The High Court noted the admitted fact that at the time of the transaction, the name of the supplier as the registered taxable person was already available in the Government record and the petitioner had paid the amount of purchased articles as well as tax thereon through bank and not in cash.

It was not the case of the Revenue authorities that there was collusion between the petitioner and supplier with regard to the transaction.

Hence, High Court found that without proper verification, it could not be said that there was any failure on the part of the petitioner in compliance of any obligation required under the statute before entering into the transaction in question.

The High Court observed that the unreported judgement in LGW Industries Limited & Ors. vs. Union of India & Ors. [WPA 23512 of 2019] was squarely applicable to the present case.

Resultantly, High Court set aside the impugned order and directed the Appellate Authority to consider the petitioner’s grievance afresh by taking into account the supporting documents.

Our Comments

Ineligibility of ITC vis-à-vis purchases from registration canceled suppliers is a common parameter in scrutiny proceedings. In such instances, the supporting documents furnished to substantiate the veracity of the transaction are often disregarded by the lower tax authorities, thereby warranting a relief in appellate proceedings.

The present order should support the taxpayers who are facing similar issues in relation to their ITC claim.

Filing of Form CSR-2 by all Companies required to do CSR spending

The Ministry of Corporate Affairs (MCA) notified the Companies (Accounts) Second Amendment Rules, 2023 (referred to as “Amendment Rules”) on 2 June 2023 to amend the existing Companies (Accounts) Rules, 2014.

As per the said amendment, all Companies falling under Section 135 of the Companies Act 2013, which mandates Corporate Social Responsibility (CSR) compliance, must file Form CSR-2 for FY 2022-23 by 31 March 2024, subsequent to the submission of either Form No. AOC-4 or Form No. AOC-4-NBFC (Ind AS) or Form No. AOC-4 XBRL (used for filing financial statements for each financial year with the Registrar of Companies) depends on the applicability.

This Form CSR-2, requires notified companies to inter-alia provide the following information:

• Details of CSR expenditure for the past three financial years and on ongoing projects.
• Details about the company’s CSR Committee.
• Confirmation of disclosure of the company’s CSR activities on its website.
• Net profit and other relevant information for the preceding financial years.
• If any capital assets were acquired or created through CSR expenditure, companies must provide details about the property’s address, location, pin code, the amount spent, and registered owner.

Our Comments

The amendment made by the MCA to the Companies (Accounts) Rules, 2014 underscores their ongoing commitment to enhancing corporate governance and accountability within India's business environment, especially especially towards CSR. Timely submission of Form CSR-2 will help corporates showcase a dedication to fulfilling CSR responsibilities and plays a vital role in advancing social welfare and promoting responsible business conduct.