From The Judiciary

Whether sales and marketing services rendered to an Indian entity by a US subsidiary in American markets qualify as Fees for Technical/Fees for Included Services?

Manthan System Inc [TS-777-ITAT-2022(Bang) IT(IT)A No.723/Bang/2022

Facts

The taxpayer is a company incorporated in the USA and a wholly owned subsidiary of MSSPL, which is established in India. The taxpayer provides sales and marketing services to MSSPL for the sale of its products/ services in the territory of North America, South America and the Caribbean markets. For the year under consideration, the taxpayer received an amount of INR 34.7 million as a sales commission. The taxpayer did not file a return in India on the premise that the said commission income is not taxable in India.

A reassessment was opened in the case of the taxpayer and the Assessing Officer (AO) claimed that the sales commission received by the taxpayer should be taxable as FTS under the Income-tax Act, 1961 (the Act) as well as the India USA DTAA. The AO opined that the taxpayer had provided project management services that fall within the ambit of FTS under the Act.

Held

The Income Tax Appellete Tribunal ('ITAT') of Bangalore has held that the taxpayer cannot be said to have provided any technical, managerial, or consultancy services to MSSPL; rather, it has been engaged as a business partner to market and promote the products or services of MSSPL outside India. The ITAT, citing various judicial precedents, observed that the sales commission received by non-resident agents cannot be deemed to accrue or arise in India, and thus, the commission received by the taxpayer cannot satisfy the definition of FTS as it is not in the nature of managerial, technical or consultancy services.

Coming to the applicability of the provisions of the DTAA, the ITAT held that prima facie that the sales and marketing services rendered by the taxpayer are not in the nature of technical or consultancy services. Moreover, even if it is assumed without admitting that marketing services are under the umbrella of technical or consultancy, it did not make available any technical knowledge, experience, know-how, or process to MSSPL (i.e., restrictive definition of FIS/FTS under DTAA).

Our Comments

The Bangalore Tribunal held that the marketing services provided by the taxpayer cannot be considered as technical, managerial or consultancy services for the purposes of FTS under the Act. Moreover, it does not ‘make available’ technical know-how as per the DTAA.

Whether equalization levy is applicable to Google Ads payments where advertisers and target audiences are overseas?

Prakash Chandra Mishra ITA No. 305/JPR/2022

Facts

The taxpayer, an individual, is the proprietor of Oan Media and Web Solutions, which is engaged in the business of providing support services for online advertisement, digital marketing, and web designing. The taxpayer receives consultancy charges for the services. During the year under consideration, the taxpayer paid advertisement (adwords) charges to Google Singapore, a non-resident who does not have a Permanent Establishment (PE) in India. The AO disallowed the above payment on the premise that since the payment was made to a non-resident for advertisement purposes in the digital mode on behalf of the taxpayer’s clients and that no tax was deducted as equalization levy on the payment made to the non-resident, it was not allowable as a deduction as per the provisions of Section 40(a)(ib) of the Act.

It was then contended before the AO that the taxpayer is merely an agent of Google Singapore, whereby it has been granted access for the purpose of advertisements to be made on Google. The taxpayer simply provides the login credentials generated on google to its clients for them to run their own advertisements.

The clients, on their own, decide where the advertisement is to be run, who would be the target audience, what would be the duration, etc. The taxpayer claimed that the provisions of the equalization levy are only confined to transactions in India. However, in the present case, the target audience of the advertisement and the person carrying out the advertisement are both outside India, resultantly Indian tax authorities have no jurisdiction to tax such transactions.

Held

On analyzing the facts of the case, the ITAT observed that the only dispute in the department’s appeal is whether the online advertisements, which are of non-jurisdictional areas are subjected to equalization levy or not. The ITAT upheld the Commissioner of Income Tax (Appeals) [CIT(A)]’s decision by observing that the department could not controvert that the person running the advertisement, the person displaying the advertisement, and the person using that advertisement are all outside India.

It was further held that equalization levy does not get attracted in the present case since the intention of levy is the targeted audience and party paying for the online advertisement who, in the present case, have no relation with India.

Our Comments

The Jaipur Tribunal held that the equalization levy should not get attracted since the intention of the levy is the targeted audience and the person paying for the online advertisement, both of which are situated outside India.

Furnishing adequate supporting evidence held to be ‘substantial compliance’; addition deleted on reimbursement of expenses, out of pocket expense and fixed assets purchased

Infinity Retail Limited² TS-721-ITAT-2022(Mum)-TP

Facts

The taxpayer is engaged in wholesale trading of consumer electronics and appliances. The taxpayer had made certain payments to its Associated Enterprise (AE) as follows:

The Transfer Pricing Officer (TPO) proposed an adjustment for all the transactions, considering that there was no basis for making such payments. In relation to the purchase of fixed assets (item C), the taxpayer purchased the IBM server from its AE on 24-Jun-2007 at the same price as what the AE had paid a third party on 29-Nov-2005. The TPO was of the view that when the taxpayer purchased the asset from the AE it was old and liable for depreciation. Hence the excess purchase price was considered as an adjustment. For Item D, the taxpayer was able to furnish bills for 78% of the transaction value and hence the TPO considered the balance as an adjustment.

Aggrieved by the decision of TPO, the taxpayer raised objections before the Dispute Resolution Panel (DRP), which upheld the adjustment for:

• Item A above, which was claimed to be booked before the execution of the inter-corporate agreement and therefore, no deduction could be allowed.
• Item D above, which were not supported by bills or document.

For item B, the DRP directed the AO to verify the expenses and allow legitimate expenses incurred for business purposes.

For item C, the DRP granted relief directing the AO to re-calculate the Arm length Price (ALP) of the asset purchased by reducing the cost of the asset by the depreciation for one year it was put to use.

Held by the ITAT

ITAT observed that the deduction for the amount (under item A) was not claimed by the Appellant while computing taxable income for the AY 2008-09; hence the question of making the disallowance or addition of the same does not arise.

For Item C, the ITAT noticed that the AE purchased the asset on behalf of the taxpayer as it was not incorporated and could not operate its bank account. Also, as stated in the original invoice, the asset was to be delivered to the taxpayer in India directly. As per the taxpayer's fixed asset register, the asset was capitalized in the books of accounts and put to use in October 2006. Thereafter, on 29 March 2007, the taxpayer entered into an Annual Maintenance Contract with IBM India for the maintenance of the asset. The taxpayer in India used the asset for the first time. Hence, given the facts of the case, the written-down value of the asset cannot be the determining factor in deciding the purchase price.

For Item D, the ITAT opined that the taxpayer can be directed to produce supporting documents pertaining to the entire amount of expenses claimed as deduction as they are obliged to maintain proper books of accounts, including vouchers. However, the taxpayer has been subjected to statutory as well as tax audits for the relevant assessment year, and no qualifications regarding accounting systems have been made by the Auditors. ITAT also stated that in cases where the supporting documents called for are not furnished or have been furnished but the same is not found to be sufficient or satisfactory by the AO, the AO would be justified in calling for any/all details and supporting documents as the AO may deem fit. However, the TPO/AO have not pointed out any defect/discrepancy in the supporting documents furnished by the taxpayer.

Hence based on the above facts the ITAT held that the taxpayer has substantially complied with the directions given by the AO and deleted the adjustment.

Our Comments

In the context of related party transactions, for reimbursements of expenses and fixed assets, it is essential that taxpayers maintain maximum supporting documentation to showcase the nature and basis of cross charge.

Whether the doctrine of promissory estoppel would apply against the exercise of legislative powers by the Centre/State?

Hero Motocorp Ltd. & Others vs. Union of India & Others [TS-519-SC-2022-GST]

Note: By virtue of Notification No. 4/2022-Central Tax (Rate), the exemption granted for residential accommodation is no longer available to tenants who are registered under GST.

Facts

• Under the Central Excise Act, 1944, a Notification was issued in 2003 whereby new industrial units and existing industrial units, on their substantial expansion, were entitled to a 100% outright excise duty exemption for 10 years from the date of commencement of commercial production.
• Accordingly, the appellants, Hero Motocorp Ltd. and Sun Pharma Laboratories Ltd., had set up new industrial units in Haridwar, Uttarakhand, and were enjoying the excise duty benefit.
• However, with the advent of the GST regime, a Notification was issued under Section 174(2)(c) of the CGST Act by which the said exemption Notifications were rescinded and the benefit ceased to continue w.e.f. 1 July 2017.
• The GST Council resolved that all entities exempted from payment of indirect tax would pay tax in the GST regime. But, in the event it was decided by the concerned State or Central Government to continue any existing exemption/incentive, then the same would be administered by way of a reimbursement mechanism through the budgetary route.
• Consequently, the Central Government restricted the CGST and IGST refund entitlement to the affected eligible industrial units for the residual period in the North Eastern and Himalayan States.
• Aggrieved thereby, the appellants approached the Delhi and Sikkim High Courts, but their writ petitions were dismissed. Hence, appeals were filed before the Supreme Court.

Judgment

• Referring to a host of judgments on the subject, SC held that the plea of promissory estoppel would not be available against the exercise of the legislative functions of the State.
• SC observed that it is a matter of policy that has to be determined by the Union/State while deciding whether it should grant exemption from payment of CGST or make a budgetary allocation for a refund of the tax paid.
• Accordingly, the Central Government was not bound to continue with its representation in 2003 in view of the change of law by enacting the CGST Act.
• Though the first part of Section 174(2)(c) would protect any right, privilege, obligation, etc., under the amended Act or repealed Acts, the proviso thereto provides that any tax exemption granted as an incentive against investment shall not continue as a privilege if the said notification is rescinded on or after the appointed day.
• Thus, accepting the appellants’ contention would make the provisions of Section 174(2)(c) of the CGST Act redundant and otiose.
• It has been consistently held that where the change of policy is in the larger public interest, the State cannot be prevented from withdrawing an incentive that it had granted through an earlier Notification.
• Consequently, the SC rejected the appeals but, at the same time, appreciated that the matter at hand was not wholly without any substance and opined that though the appellants may not have a claim in law, they do have a legitimate expectation that their claim deserves due consideration.
• Accordingly, SC permitted the appellants to make appropriate representations to respective State Governments and the Centre/ GST Council and requested them to consider such representations expeditiously.

Our Comments

This judgment is yet another landmark verdict in the context of the applicability of the principle of promissory estoppel in taxation laws. The Court reiterated the settled position that it could not interfere in the policy matters of the government, unless such a policy is found to be palpably arbitrary and irrational.

Transfer Pricing not applicable in slump sale between two Indian Associate Enterprises held by a foreign holding company

MWH India Pvt Ltd [TS-698-ITAT-2022(Mum)-TP]

Mumbai Tribunal has held that the transaction of slump sale between Indian associate enterprises would not be an international transaction even where both are held by the same foreign company. Accordingly, provisions of transfer pricing will not apply. This is on the rationale that none of the parties are non-residents and a domestic slump sale would not fall under the definition of ‘International Transaction’ as the precondition for a transaction to qualify as an international transaction is that the transaction is between two or more AE s, out of which at least one should be a non-resident. Noting that both the companies involved are residents of India, Transfer Pricing provisions will not be applicable.

Our Comments

The decision is welcome as it provides the requisite clarity by upholding the non-applicability of Transfer Pricing provisions on domestic transactions. This purely required the plain reading of the meaning of the term international transaction as per the provisions. Unless covered within the ambit of a specified domestic transaction, transactions between two domestic parties should not be a subject matter of transfer pricing provisions.

Brought forward business loss can be set off against capital gain arising on the sale of business assets

[2022] 141 taxmann.com 131 (Kolkata - Trib.)/[2022] 196ITD 316 (Kolkata - Trib.)

The Kolkata Tribunal has income by way of short-term capital gain received on the sale of leased properties shall be allowed to be set off against brought forward business loss. Generally brought forward, business losses can be set off only against business profit. However, under the current circumstances, given that the income arose from the sale of a business asset but merely classified under the head ‘capital gains’ and not ‘profits or gains from business or profession,’ such income should be considered as arising from the business. Accordingly, brought forward business loss should be eligible to be set off against capital gains on the sale of a business asset.

Our Comments

While rendering the decision, the Tribunal has undertaken a very fine reading of the provisions and taken cognizance of the interplay between the various provisions of the Act. While this has been an interesting proposition that has been upheld in the past in various decisions, this view is certainly not free from litigation. Nonetheless, based on the peculiar facts of each case, the adoption of this proposition may be considered.