tax digest - eyfile/… · 2 tax digest dear readers, we are pleased to present the june 2017...

Tax DigestQuarterly newsletterJune 2017

2 Tax Digest

Dear readers,We are pleased to present the June 2017 edition of EYs quarterly newsletter, Tax Digest, which summarizes significant tax and regulatory developments during the April to June quarter.

This newsletter is designed as a ready reckoner and covers landmark tax judgments, updates on tax treaties and alerts on topical developments in the tax arena. The In the press section includes published articles on various issues in the tax realm over the last quarter. It also details key thought leadership reports and other topics of interest to tax professionals.

We hope you find this edition both timely and insightful.

Best regards, EY Tax Update team

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Direct tax Verdicts

Reported decisions supported by our Litigation team

Special Bench (SB) of Hyderabad Tribunal rules lower tax treaty rates apply for payments to non-residents (NRs) even in absence of Permanent Account Number (PAN)

Pune Tribunal rules on taxability of royalty at lower rate of tax prescribed in the ITL

Significant Supreme Court (SC) rulings

Sale of running business with all assets and liabilities for a slump consideration is not taxable as deemed short-term capital gain

SC upholds disallowance of expenditure on default in withholding tax, irrespective of whether it is paid or payable

SC rules on characterization of property rental income as income from house property

SC rules share premium not part of capital employed for amortized deduction of preliminary expenditure

Accumulated losses of amalgamating company to be set off after reducing interest waiver benefit

SC rules that holding Formula One Grand Prix of India results in a Permanent Establishment (PE) in India

SC upholds disallowance of expenditure incurred in relation to exempt dividend income

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Rulings on Foreign Tax Credit (FTC)

FTC is to be restricted to rates prescribed in the tax treaty

Delhi HC allows FTC under India-Oman tax treaty in respect taxes on dividend income, despite such income being exempt under Omani tax laws

Rulings on deductibility of expenditure

Mumbai Tribunal deletes disallowance in absence of exempt income

Legal fees paid cannot be denied revenue deduction merely because it is exorbitant in nature

Other significant decisions

Delhi HC upholds constitutional validity of provision mandating filing of tax return within prescribed due-date to claim tax holiday

Gujarat HC lifts corporate veil in case of a defacto private company

Delhi Tribunal rules on indirect transfer of shares on transaction undertaken in 2006

Excess price paid over the fair value of shares in a buyback to be regarded as dividend

Is there a Permanent Establishment (PE)?

Chennai Tribunal rules on existence of PE of a Mauritius bank in India

Some key issues where Special Leave Petitions (SLPs) were admitted by SC

Recent decisions on taxation of royalty/fees for technical services (FTS) payments

From the Tax Gatherers desk

Central Board of Direct Taxes (CBDT) issues clarifications for smooth implementation of Income Computation and Disclosure Standards (ICDS)

CBDT releases draft ICDS on real estate transactions

CBDT issues draft rules prescribing methodology for determining fair market value of unquoted equity shares

CBDT notifies cases for waiver/reduction of interest on default in withholding of taxes

Finance Act, 2017 enacted

ITR forms for tax year 2016-17 notified

CBDT clarifies rental income from letting out premises along with amenities in an industrial park/special economic zone (SEZ) to be taxed as business income and not as income from house property

CBDT provides clarification on receipt-based taxation of salary income of NR seafarer

CBDT clarifies place of effective management (POEM) test not applicable for companies with gross receipts/turnover up to INR500 million

CBDT clarifies on rescission of Cypruss status as Notified Jurisdictional Area (NJA) retrospectively

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Treaty updates

Protocol to treaty between India and Vietnam enters into force

Protocol to treaty between India and Singapore enters into force

Protocol to treaty between Belgium and India signed

Happenings across the border

Organisation for Economic Co-operation and Development (OECD) Secretary-General sends tax update to G20 Finance Ministers, including International Monetary Fund (IMF)/OECD report on tax certainty

Global Forum on Transparency and Exchange of Information for Tax Purposes includes progress report to G20 Finance Ministers

United Nations (UN) releases 2017 update to TP Manual

OECD BEPS updates

Union Cabinet of India approves signing multilateral instrument (MI) in June 2017 for implementing tax treaty related BEPS measures

OECD releases further guidance on five issues relevant for Country-by-Country (CbC) reporting implementation

OECD releases CbC reporting implementation status and exchange relationships between tax administrations

OECD releases implementation guidance on hard-to-value intangibles (HTVI)

Indirect taxCase laws

Customs duty

Supreme Court

Appropriate remission to be granted on demurrage charges on goods imported before title acquisition

High Court, Delhi

No prohibition on discharge of Export Obligation (EO) in Indian rupees under Advance License

High Court, Madras

Custodian is liable for clandestine substitution of goods during transportation to port of export

High Court, Kerala

Quashes Circular classifying dialysis equipment under Custom Tariff heading 8421 as blood cannot be equated as a liquid using common parlance principle

Excise duty

Supreme Court

Court cannot direct Government to grant exemption

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High Court, Uttarakhand

NCCD not exempt under area-based Notification

CESTAT, Mumbai

Section 4A not applicable for valuation of pre-packaged MRP affixed goods produced for Canteen Stores Department

CESTAT, Mumbai

Relabeling of retail pack after taking out from master pack and thereafter selling does not amount to manufacture

CESTAT, Bangalore

Assembling components and units into computer system does not amount to manufacture

CENVAT credit

High Court, Madras

Refund of CENVAT credit availed at unregistered premises for export of services is permissible

Tribunal, Ahmedabad

Duty paid on goods at the time of removal from factory shall be available as CENVAT credit if such goods are brought back to the factory treating them as inputs

No reversal of CENVAT credit availed on input services used for providing output services if the output service dues are written off

Tribunal, Allahabad

Availment of CENVAT credit on cement used in the foundation of machineries is allowed where the said machineries are further used to manufacture taxable products

Service tax

Tribunal, New Delhi

Refund claim of tax deposited erroneously cannot be denied on the ground of unjust enrichment

Value Added Tax/Central Sales Tax/Entry Tax

High Court, Bombay

Maharashtra Value Added Tax Act, 2002: Providing buses on rental basis would attract VAT if transfer of right to use can be established

High Court, Hyderabad

Andhra Pradesh VAT Act, 2005: Based on the terms of the contract, transaction in the nature of transfer of right to use can be determined to attract VAT thereon

High Court, Calcutta

West Bengal Value Added Tax Act, 2003: Whether the word payment used in the second proviso of

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Section 84(1) in relation to filing of an appeal is unconstitutional

Tribunal, Mumbai

Central Sales Tax Act, 1956: Nature of transaction, viz., interstate supply of goods or stock transfer, depends on whether the transfer is a result of interstate purchase order or without any order in hand

Key statutory updates

Customs duty

Foreign Trade Policy 201520 (FTP)

Central Excise

Service tax

VAT

Regulatory Foreign Exchange Management Act (FEMA) 1999

RBI notifies the provisions on FDI in the e-commerce sector and conversion of a company into LLP

RBI liberalizes the provisions for persons resident outside India entering into foreign exchange derivative contracts

Foreign Direct Investment Policy (FDI policy)

Union Cabinet approves the decision to abolish Foreign Investment Promotion Board (FIPB)

In the press

Compilation of alerts

Direct Tax

Indirect Tax

Regulatory

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Whats new Useful links

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DigiGST (EY GSP-ASP solution)

EY India Tax Insights App - Download from Google Play Store and Apple Store

All about GST in India

Budget Connect 2017

India focus on Base Erosion and Profit Shifting (BEPS)

Working outside India

The UK as a favored location for Indian investments

India Tax Insights magazine issue 10

Tax Insights magazine

India Tax Webcast

Tax Library

Follow us on Social Media:

EY India Tax Insights Linkedin Group

India Tax Insights Blog

www.ey.com

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Verdicts!

Direct taxReported decisions supported by our Litigation team:

Special Bench (SB) of Hyderabad Tribunal rules lower tax treaty rates apply for payments to non-residents (NRs) even in absence of Permanent Account Number (PAN)

In the case of Nagarjuna Fertilizers and Chemicals Ltd. [TS-67-ITAT-2017(Hyd)], the issue before the SB of Hyderabad Income Tax Appellate Tribunal (Tribunal) was whether higher rate of withholding at 20% in the absence of PAN under the Indian tax laws (ITL) (higher withholding provision) overrides lower tax rates provided under tax treaty while making payments to NRs.

The SB ruled in favor of the taxpayer and held that tax treaties are a mini-legislation by themselves and by virtue of the specific provision of the ITL, it overrides even the charging provisions of the ITL to the extent they are inconsistent with tax treaties. Since charging and machinery provisions are integrated with each other, beneficial tax treaty provisions override machinery provisions as well. Higher withholding provision, being a machinery provision, has to yield to the lower rate provided under the tax treaty. The non-obstante clause in machinery provisions has to be assigned a restrictive meaning, which does not override charging provisions. Hence, even in the absence of PAN of the NR payee, the taxpayer was liable to withhold at lower rates as per tax treaties.

Furthermore, at the relevant point of time, there was no obligation on NRs to obtain PAN. Higher withholding provision cannot apply if there is no obligation to obtain PAN.

(Click here for EY Tax Alert dated 22 February 2017 for more details)

Pune Tribunal rules on taxability of royalty at lower rate of tax prescribed in the ITL

In case of Piaggio & C.S.p.A (80 taxmann.com 100-Pune), the taxpayer, an Italian company engaged in the manufacturing of motor vehicles, had earlier entered into a licensing agreement with its Indian subsidiary (I Co) in the year 2003 for licensing manufacturing technology.

The taxpayer was offering royalty income from the said agreement to tax at the rate of 20% under the India-Italy tax treaty. However, after the earlier license agreement expired, the taxpayer entered into a new royalty agreement in the year 2008. Under the ITL, the tax rate for royalty is revised to 10% where the agreement is executed on or after 1 June 2005. Accordingly, income earned under the new royalty agreement was offered to tax at the beneficial rate of 10% as prescribed under the ITL. On the other hand, the tax authority opined that the new agreement was only an extension of the old agreement and hence, even in terms of the new agreement, tax on royalty was to be paid at the rate of 20%

The Pune Tribunal reviewed various clauses of both the agreements in detail and held that the new agreement was not an extension of the earlier agreement based on the following key parameters:

a. The products licensed under the two agreements were different

b. The territories in which licensed products could be exported were different

c. Certain clauses such as non-compete were absent in the new agreement

Further, based on the principles laid down by various court cases, the Tribunal concluded that once an independently enforceable agreement is entered into, it constitutes a new agreement even if there is no change in the terms and conditions as compared to the old agreement. Thus, the Tribunal held that the new royalty agreement was an independent agreement governing all the rights and obligations of the parties without any reference to the old agreement and hence cannot be considered as an extension of the old agreement. Accordingly, the Tribunal ruled in favor of the taxpayer that royalty received under the new royalty agreement should be taxable at the beneficial tax rate of 10% under the provisions of the ITL.

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Significant Supreme (SC) Court rulings

Sale of running business with all assets and liabilities for a slump consideration is not taxable as deemed short-term capital gain

In the case of Equinox Solution Pvt. Ltd. [TS-149-SC-2017], the taxpayer had sold its entire business undertaking along with all the assets and liabilities to a buyer at a slump price. Since undertaking was held for more than three years, the taxpayer offered gains as long-term capital gains. However, the tax authority considered the sale of entire business as sale of depreciable assets and thus treated capital gains as short-term capital gains as per the specific provision of the ITL1.

The SC ruled in the favor of the taxpayer2 and held that transfer under consideration was of the entire running business undertaking with all assets and liabilities for slump consideration and not of individual block of depreciable assets so as to trigger the specific provision of ITL.

SC upholds disallowance of expenditure on default in withholding tax, irrespective of whether it is paid or payable

In the case of Palam Gas Service [TS-170-SC-2017], the issue before the SC was whether disallowance of expenses for failure to withhold taxes under the ITL is applicable only in respect of expenses that remain payable or it also covers expenses actually paid during the year without withholding of taxes. The ITL provides for various consequences for failure to withhold taxes, which include disallowance of expenses payable, on which tax is deductible at source but such tax has not been deducted or, after deduction, has not been paid on or before the due date of filing return of income (disallowance provision).

The use of the expression payable in the disallowance provision gave rise to an issue of whether the disallowance applies only in respect of expenses remaining payable as on the last day of the tax year or whether it is also applicable in respect of expenses paid during the tax

year without withholding tax. The High Courts (HCs) were divided on this issue, but majority of the HCs held that disallowance is triggered even if expenses are paid during the tax year without withholding tax. After taking note of the conflicting rulings of the HCs on the issue, the SC upheld the view taken by the majority of the HCs, that disallowance is triggered regardless of whether the amounts are payable or are actually paid during the tax year.

(Click here for EY Tax Alert dated 5 May 2017 for more details)

SC rules on characterization of property rental income as income from house property

In the case of Raj Dadarkar & Associates [TS-183-SC-2017], the taxpayer, a partnership firm, was set up with the object of taking premises on rent and sub-letting them. It acquired certain premises on long-term lease and developed them into a marketplace by constructing shops and stalls. The units were sub-let with certain amenities such as electricity, sanitation, security and water. A part of the monthly amount was collected as service charges. The taxpayer claimed its income from rent and service charges as taxable under the Business Income head on the basis of earlier SC rulings in the cases of Chennai Properties & Investments (Chennai Properties ruling) [14 SCC 793] and Rayala Corporation Pvt. Ltd. (Rayala Corporation ruling) [15 SCC 201], wherein the SC had held that where the main object of the taxpayer as per its Memorandum of Association (MoA), as also the actual activities carried on by the taxpayer, comprised only acquisition and holding of properties and letting them out, the property rental income is assessable under the Business Income head.

1S.50 of the ITL provides for deeming fiction wherein capital gains arising on sale of depreciable asset would be deemed to be capital gains arising from the sale of short-term capital asset even if such depreciable assets are held for more than 3 years.2It may be noted that the SC ruling has limited application since it pertains to a period prior to the introduction of a specific provision of the ITL con-cerning the mechanism to compute capital gain where the sale of a business is on a slump sale basis without assigning values to individual asset and liability.

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The SC, in the present case, held that the object clause of the business is not a determinative factor to arrive at the conclusion that the income is income from business and that classification depends on the facts of each case. The SC noted that, as per the undisputed finding of facts, the taxpayer was not engaged in any systematic or organized activity of providing services to the occupiers so as to constitute its income as income from business. Also, the taxpayer did not furnish sufficient material to show that its entire income or substantial income was from letting out of the property so as to constitute the principal activity of the taxpayer. On the facts of the case, the SC concluded that the facts on hand were distinguishable compared to its earlier ruling in the case of Chennai Properties but were comparable to its earlier ruling in the case of East India Land Development Trust (East India ruling) [42 ITR 49,SC] wherein property rental income was assessable under the House Property head, as the core or main object and activity of the company was not letting out of property but developing and setting up of markets.


SC rules share premium not part of capital employed for amortized deduction of preliminary expenditure

In the case of Berger Paints India Ltd [TS-120-SC-2017], the issue before the SC was whether share premium collected on subscribed share capital forms part of capital employed for amortized deduction of preliminary expenditure, which, inter alia, is currently capped at 5% of capital employed. The SC, after considering the definition of capital employed, which refers to aggregate of the issued share capital, debentures and long-term borrowings, held that the legislative intent is to exclude share premium because the definition merely refers to issued share capital, and not share premium. According to the SC, had the intention been otherwise, the definition would have specifically referred to share premium in addition to issued share capital, as was the case in the context of the erstwhile provision granting rebate from super-tax. The SC also noted that the Indian corporate laws treat issued share capital and share premium separately.

(Click here for EY Tax Alert dated 30 March 2017 for more details)

Accumulated losses of amalgamating company to be set off after reducing interest waiver benefit

In the case of McDowell & Company Ltd. [TS-147-SC-2017], the issue before the SC was whether the quantum of business loss transitioned to the amalgamated company needs to be reduced by the benefit obtained by the amalgamated company in respect of waiver of unpaid interest of the amalgamating company. Prior to the amendment to the ITL by the Finance Act, 1992 (with effect from tax year 1992-93), there was no provision in the extant ITL to tax benefit obtained by an amalgamated company in respect of remission of trading liability of the amalgamating company. Despite the absence of such a provision, the SC held that if the amalgamated company is availing the benefit of set off of accumulated losses of the amalgamating company, in accordance with specific provisions of the ITL, the quantum of such benefit needs to be reduced by the value of the benefit obtained in respect of remission of trading liability. The SC held that such adjustment is necessary to ensure that the benefit of set off of accumulated losses of the amalgamating company is restricted to the actual accumulated losses.

(Click here for EY Tax Alert dated 19 April 2017 for more details)

SC rules that holding Formula One Grand Prix of India results in a Permanent Establishment (PE) in India

In case of Formula One World Championship Ltd. [TS-161-SC-2017], the taxpayer, a UK company, had entered into an agreement with an Indian company (I Co.) to grant the right to promote, host and stage Formula One Grand Prix (F1 event) in India. The F1 event was held at a racing circuit owned by I Co. in India. The issue under consideration before the SC was whether the circuit where the F1 event was held constituted a PE of the taxpayer in India under the India-UK tax treaty.

The SC ruled that the F1 event conducted in India was a virtual projection of the taxpayer on Indian soil. There was active participation of the taxpayer in the F1 event with access and control over the circuit. The taxpayer controlled

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every aspect of the event, either directly or through its affiliates, including the manner in which the circuit was to be built. The SC held that that taxpayer had a fixed place of business in the form of physical location, i.e., circuit, which was at the disposal of the taxpayer through which it conducted business. Though the access granted to the taxpayer was not permanent or everlasting, having regard to the commercial transactions, access for the short duration of two weeks was sufficient for creation of a fixed place PE.

Further, the SC held that only income attributable to such fixed place PE will be taxable in India and I Co. was liable to withhold taxes on such income in India, which needs to be determined by the tax authority.

SC upholds disallowance of expenditure incurred in relation to exempt dividend income

In the case of Godrej and Boyce Manufacturing Co. Ltd. [TS-176-SC-2017], the issue before the SC was whether the disallowance under S.14A3 of the ITL would apply on expenditure incurred for earning exempt dividend income on which Dividend Distribution Tax (DDT) is paid by the dividend paying company. The SC held that, on principles, S.14A applies to dividend income since it is exempt from tax in the hands of the shareholder, although it suffers DDT in the hands of dividend paying company. Furthermore, this position emerges from a plain and literal reading of S.14A, which is consistent with the scheme of the ITL and the legislative object of introduction of this provision.

However, the SC also held that the disallowance under S.14A is triggered only if there is proof that the expenditure sought to be disallowed has actually been incurred in earning exempt dividend income. In the facts of the present case, the tax authority had failed to establish a reasonable nexus between interest expenditure sought to be disallowed and exempt dividend income. Moreover, the tax authority had accepted in earlier years litigation that the investments yielding exempt income were not made from borrowed funds. There being no change in the facts or law in the current year, the SC held that the tax authority was not justified in departing from a settled position of earlier years.


Rulings on Foreign Tax Credit (FTC):

FTC is to be restricted to rates prescribed in the tax treaty

IIn the case of Bhavin Shah [TS-130-ITAT-2017(Ahd)], the issue before the Ahmedabad Tribunal was the eligibility of the taxpayer to claim FTC in respect of taxes withheld in the US on the dividend incomes received by the taxpayer. The Tribunal, based on its combined reading of the provisions of the India-US tax treaty governing FTC and dividend, held that the following conditions have to be satisfied for claiming FTC in India in respect of dividend income:

The taxpayer should be a treaty resident of India, as defined in the India-US tax treaty. Residency under the ITL alone is not sufficient.

Income received by the taxpayer should qualify as dividend under the Dividend Article of the India-US tax treaty.

Dividend income of the taxpayer should have been taxed in the US in accordance with the provisions of the India-US tax treaty.

Taxation may be by way of either direct payment or tax withholding.

The Tribunal further ruled that where withholding is at a rate higher than the rate prescribed in the India-US tax treaty, the taxpayer will be eligible to claim FTC restricted to the amount computed based on the rates prescribed in India-US tax treaty.

The matter was thereafter remanded back to the tax authority to determine the eligible amount of FTC in accordance with the above principles.


3 S.14A of the ITL provides that for the purposes of computing total income of the taxpayer under the ITL, no deduction shall be allowed in respect of expenditure incurred by a taxpayer in relation to the exempt income.

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Delhi HC allows FTC under India-Oman tax treaty in respect taxes on dividend income, despite such income being exempt under Omani tax laws

In case of Krishak Bharati Co-operative Ltd. [TS-160-HC-2017(DEL)], the taxpayer received dividend income from its investments in an Omani company on which it was not liable to pay any tax in Oman by virtue of specific exemption granted as per Omani tax laws. The taxpayer offered such dividend income to tax in India and claimed credit of taxes that would have been payable in Oman but for the exemption granted.

Under the tax treaty between India and Oman, in order to claim credit of taxes, tax should have been payable in Oman if not for the tax incentives granted in Oman to promote economic development. The tax authority was of view that the exemption granted by Oman cannot be treated as a tax incentive as it existed across the board and was simply a feature of Omans tax law, which does not tax dividend income.

On appeal, the Delhi Tribunal, based on the clarifications issued by the Sultanate of Oman, held that the intent of dividend exemption was to promote Omani economic development and to encourage investment in Omani companies. The Tribunal made a remark that the interpretation of Omani tax laws can be clarified only by the highest tax authorities of Oman and such interpretation given by them must be adopted in India. Thus, the Tribunal ruled in the taxpayers favor and granted tax credit to the taxpayer.

Aggrieved, the tax authority appealed before the Delhi HC. Concurring with the Tribunals decision, the Delhi HC also took note of the clarifications issued by the Sultanate of Oman and assessment made under Omani laws and confirmed that the purpose of the exemption was to promote economic development. Accordingly, it held that the taxpayer was entitled to tax credit in respect of Omani taxes on dividend income, despite such income being exempt under Omani tax laws.

Rulings on deductibility of expenditure

Mumbai Tribunal deletes disallowance in absence of exempt income

In the case of Morgan Stanley India Securities Pvt. Ltd. [TS-153-ITAT-2017(Mum)], the issue before the Mumbai Tribunal was whether the disallowance u/s s.14A of the ITL would apply on expenditure incurred to earn exempt income if no exempt income has been earned during the relevant year. The taxpayer in this case was a holding company and had made certain strategic investments in group companies. The taxpayer did not earn any income from the investments in the relevant year and had voluntarily disallowed administrative expenses while computing the total income. The Tax Authority contended that considering the provisions of s.14A, the expenditure incurred for earning exempt income should be disallowed

The Mumbai ITAT noted that the taxpayer had not earned any exempt income during the year and further the administrative expenses had been disallowed while computing the total income. The Mumbai ITAT relied on Delhi HC rulings in the case of Cheminvest Ltd. [(2015) 61 taxman.com 118 (Del.)] and Holcim India P. Ltd. [(2015) 57 taxman.com 28 (Del.)] and held that Section 14A of the ITL will not apply where no exempt income is received or receivable during the relevant previous year and ruled in favor of the taxpayer.

Legal fees paid cannot be denied revenue deduction merely because it is exorbitant in nature

In the case of Managed Information Services Pvt. Ltd. [TS-137-HC-2017(MAD), the taxpayer had incurred legal fees in the UK for filing a case in relation to infringement of rights of software owned by the taxpayer. The legal fees incurred by the taxpayer amounted to INR19 million, whereas the compensation received by the taxpayer for infringement of rights was INR8 million. The tax authority contended that the legal fees paid by the taxpayer were not allowable as revenue expenditure, as they were exorbitant and far in excess of the compensation received in the matter.

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The Madras HC held that the test for allowing expenditure as a revenue expenditure is whether the expense is laid out or incurred wholly and exclusively for the purpose of business. For this purpose, the fact to be borne in mind is that it is incurred on account of commercial expediency of the taxpayer and commercial expediency is to be looked at by the tax authorities by placing themselves in the shoes of a prudent businessperson.

The HC thus ruled in favor of the taxpayer by ruling that so long as an expense is incurred wholly and exclusively for the purpose of the business carried on by the taxpayer, it has to be allowed as revenue expenditure.

Other significant decisions

Delhi HC upholds constitutional validity of provision mandating filing of tax return within prescribed due-date to claim tax holiday

In the case of Nath Brothers Exim International Ltd. [TS 164-HC-2017 (Del)], the taxpayer challenged the constitutional validity of a specific provision of the ITL that mandated timely filing of return of income (ROI) to claim profit-linked tax holiday benefits for exports and other qualifying activities. Through various amendments, the ITL introduced two additional cumulative conditions for the eligibility to claim tax holiday deduction: (a) claim for deduction should be made in the ROI and (b) the ROI for the relevant tax year should be furnished within the due date prescribed in the ITL (additional conditions). Non-compliance with any of these conditions makes a taxpayer ineligible to claim tax holiday deduction for that year. For tax year 2006-07, the taxpayer had failed to furnish ROI within the prescribed time. The tax authority denied the claim for the tax holiday for breach of the additional conditions.

The taxpayer invoked Article 14 of the Constitution of India (Constitution), which guarantees the right to equality to every citizen of India, and contended that the additional conditions imposed on taxpayers who are eligible to claim profit-linked incentive deduction act as rigid barriers, which do not subserve the object of grant of tax holiday and impede genuine claims of the taxpayers.

The HC upheld the validity of the additional conditions by ruling that they were introduced to ensure timely filing of ROIs by taxpayers, to improve tax compliance and to avoid multiplicity of tax claims and also that the additional conditions have a rational nexus with the objective for proper scrutiny of taxpayers ROI. The HC further held that the amendments do not curtail any taxpayers vested right but only impose a duty or obligation to claim deduction in a timely manner. According to the HC, the Parliament acted within its power as the classification between two sets of taxpayers in the present case (i.e., who make claims through timely ROIs and others who do not) is founded on intelligible differentia and such differentia has a rational connection with the object of proper scrutiny sought to be achieved.


Gujarat HC lifts corporate veil in case of a defacto private company

In the case of Ajay Surendra Patel (taxpayer) [TS-79-HC-2017(Guj)], the taxpayer was director of a public limited Indian company (I Co.). The issue before the Gujarat HC was whether the taxpayer can be held liable for the tax dues of I Co. Under the ITL, tax dues of a private company can be recovered from the persons who were directors of the company during the relevant tax years in respect of which the taxes are due in case the taxes are irrecoverable from the company itself. However, the provision refers to private companies and not public companies.

In this case, having regard to the exceptional facts of the case, the HC inferred that affairs of I Co. were carried on like a private limited company by way of a systematic device for evasion of taxes4. Though I Co. was a public limited company, it did not involve the public in any substantial form and hence it was defacto a private limited company. Basis this, the HC ruled that even though the provision of the ITL relating to recovery from directors are applicable only to a private limited company, they cannot be read hyper-technically to prevent their applicability to I Co. in the given case merely because it is a public limited company. Thus, the HC lifted the corporate veil and treated the taxpayer as liable to repay the tax dues of I Co. under the above-referred provision of the ITL.

4The HC noted that the tax dues pertained to the period during which the taxpayer was a director and it was during that pe-riod the assets, debtor and bank balances of I Co. effectively became nil. Although the schematics of the mechanism through which tax payment was deferred is not clear, based on the above illustrative facts it appears to be influenced by the fact that the funds of the company were siphoned off for deferment/non-payment of tax dues.

http://www.ey.com/Publication/vwLUAssets/ROI_Additional/$FILE/ROI_Additional.pdfhttp://www.ey.com/Publication/vwLUAssets/ROI_Additional/$FILE/ROI_Additional.pdf

14 Tax Digest

Delhi Tribunal rules on indirect transfer of shares on transaction undertaken in 2006

In case of Cairn UK Holding Ltd. (taxpayer/UK Co) [TS-89-ITAT-2017(Del) , the issue before Delhi Tribunal was on the tax implication of a transaction undertaken pursuant to an internal re-organization (sometime in 2006) by the taxpayers group with an intent to simplify the existing group structure, improve its effective management and also gain access to the Indian capital market.

Briefly, the transactions involved were as under:

Cairn Energy PLC, the parent entity of the taxpayer in the UK, transferred shares of its nine Indian wholly owned subsidiaries (WOS) to the taxpayer against issuance of shares. No capital gains tax was paid on this transaction.

These shares were again transferred by the taxpayer to a subsidiary incorporated in Jersey (Jersey Co.) against issuance of shares. After this, Jersey Co. held investments in Indian WOS and derived its value substantially from the assets located in India.

Subsequently, shares of Jersey Co. were transferred to a newly incorporated Indian company (I Co.) for consideration partly payable in cash and partly by issuance of shares.

A pictorial representation of the transactions undertaken is given below:

The Tribunal ruled that the transfer of shares of Jersey Co. by the taxpayer was liable to tax in India based on the indirect transfer provisions under the ITL (which were introduced in the year 2012 with retrospective effect from 1 April 1962) as the Indian WOS will be regarded as the property in which the shareholders have the right to manage and control the business in India. The Tribunal disregarded the taxpayers claim of no real income being accrued in the hands of the taxpayer, and relied on the financial statements provided by the Taxpayer, wherein exceptional gain on transfer of shares of Jersey Co. was accounted by the taxpayer without any tax implications.

Further, the Tribunal also noted that cash consideration paid by I Co. to the taxpayer for acquisition of Jersey Co.s shares was partly from out of the funds raised from initial public offering in India. Thus, the reorganization created wealth for the taxpayer, which would be liable to capital gain tax in India.

On levy of interest, the Tribunal, based on judicial precedents, agreed that the taxpayer could not have visualized its liability for payment of advance tax in the year of transaction, hence interest on tax liability cannot be levied.


Excess price paid over the fair value of shares in a buyback to be regarded as dividend

In the case of Fidelity Business Services India Pvt. Ltd. [TS-110-ITAT-2017(Bang)], the taxpayer, an Indian company, was a wholly owned subsidiary of a Mauritian parent. The taxpayer had undertaken a buyback transaction at a very high price in the tax year 2010-115 and remitted the proceeds to its only shareholder in Mauritius. The issue before the Tribunal was whether such buyback can be treated as dividend, subject to tax in India under the ITL.

The Tribunal held that under the provisions of the ITL, a plain and simple transaction of buyback at fair value will not qualify as dividend and will be taxable as capital gains in the hands of the shareholder. In the taxpayers case, such capital gains in the hands of the Mauritian shareholder are not taxable in India by virtue of the India-

CairnEnergy

Taxpayer (UK Co)

Subsidiaries in India

Jersey

UKStep 1*

India

Jersey Co

Step 2**

Step 3***:Transfer by UK Co. of Jersey

Co. shares to I Co. in exchange for ~49% shares in I Co. and

cash consideration

*Step 1: Transfer of subsidiaries in India held by Cairn Energy to UK Co.** Step 2: Transfer of subsidiaries (acquired from Cairn Energy) by UK Co. to Jersey Co.*** Step 3: This step was the subject matter of consideration before the tribunal

I Co

5Till 2013, there was no tax on a company buying back its own shares under the ITL. Effective from June 2013, the ITL has introduced a new levy called buyback tax (BBT) on the amount distributed by a company to its shareholders on buying back of its own shares.

http://www.ey.com/Publication/vwLUAssets/IDT_2006/$FILE/IDT_2006.pdfhttp://www.ey.com/Publication/vwLUAssets/IDT_2006/$FILE/IDT_2006.pdf

15 Tax Digest

Mauritius tax treaty. However, in a case where the buyback is undertaken at an artificially inflated price, it may qualify as a colorable device for avoiding tax and any excess consideration paid over and above the fair market price of the shares can be deemed as dividend (as if the payment by the taxpayer was for the benefit of the shareholder holding more than 10% voting power) under the ITL. The matter was therefore remanded to the tax authority to determine the tax implications in light of the above principle.


Is there a PE?

Chennai Tribunal rules on existence of PE of a Mauritius bank in India

In case of Hyundai Motor India Ltd. [TS-166-ITAT-2017(CHNY)], the taxpayer, an Indian company, had borrowed funds from two Mauritian banks. These banks had group companies/affiliates in India (Indian affiliates). While making interest payments on such loans to the banks, the taxpayer did not withhold taxes as the provision of Interest in the India-Mauritius tax treaty provides a specific exemption in case of banking institutions from taxation in source state.

However, the tax authority contended that the Indian affiliates constituted PE of lender banks in India, as the loan-related agreements were signed at local offices of the Indian affiliates, which also stood as guarantors to the borrowings. Accordingly, the interest income on borrowed funds was taxable in India.

The Chennai Tribunal observed that the Mauritian banks had no right to use the offices of the Indian affiliates for its business purpose. Further, the Indian affiliates had no authority to conclude contracts on behalf of Mauritian banks in India. Accordingly, it held that the Indian affiliates did not constitute PE in India. Further, the money was lent by the Mauritian banks and it belonged to them. Accordingly, the beneficial owners of interest income were the Mauritian banks and the exemption under provision of Interest in India- Mauritius tax treaty must be available to them.

http://www.ey.com/Publication/vwLUAssets/Bangalore_Tribunal_rules_excess_price_paid/$FILE/Bangalore_Tribunal_rules_excess_price_paid.pdfhttp://www.ey.com/Publication/vwLUAssets/Bangalore_Tribunal_rules_excess_price_paid/$FILE/Bangalore_Tribunal_rules_excess_price_paid.pdf

16 Tax Digest

Citation Particulars Ruling of HC

Nortel Networks India

International Inc. (SLP No. 6501/ 2017)

Revenue preferred an SLP against Delhi HCs order ruling that activities carried out by a foreign companys Indian subsidiary do not constitute a PE in India

In this case, the taxpayer, a US company, had a subsidiary in India (Nortel India), which had negotiated and entered into three contracts with Reliance Infocom for equipment supply.

On the same date, Nortel India entered into an agreement with the taxpayer to assign all rights and obligations to sell, supply and deliver equipment to the taxpayer.

The tax authority held that Nortel India constituted taxpayers PE in India as the taxpayer did not have any financial/technical ability to perform the equipment contract.

The Delhi HC noted that Nortel India neither habitually exercised any authority to conclude contracts nor maintained any stocks of goods for delivering on the taxpayers behalf.

The HC also observed that offices of Nortel India were not at the taxpayers disposal and no services were performed by Nortel India on the taxpayers behalf. Accordingly, it dismissed the allegation that the taxpayer had a fixed place PE or service PE in India.

Further, the HC stated that in order to conclude that Nortel India constituted a dependent agent PE (DAPE), it would be necessary for the tax authority to notice at least a few instances where contracts had been concluded by Nortel India in India on behalf of other group entities. In the absence of any such evidence, the HC held that Nortel India did not constitute DAPE of the taxpayer in India.

Also, on perusal of services contract, HC noted that installation, commissioning and testing were performed by Nortel India on its own behalf and not on behalf of the taxpayer. Thus, it was held that the taxpayer did not have an installation PE in India as well.

Also, the HC held that the taxpayer had received only the consideration for the equipment manufactured and delivered overseas, hence no part of the taxpayers income would be chargeable under the ITL as no income portion could be attributed to operations in India.

Refer the June 2016 edition of EYs Tax Digest for details of the HC ruling.

Some key issues where special leave petitions (SLPs) were admitted by SC:

17 Tax Digest

Name of the decision

Description of the payment

Ruling

Saira Asia Interiors Pvt. Ltd. [79 taxmann.com 460]Ahmedabad Tribunal

IndiaItaly tax treaty

Payment for use of technical know-how

The taxpayer, an Indian company, was required to make payment on account of use of technical know-how to an Italian entity.

The issue under consideration was whether tax withholding is triggered at the point of crediting royalty income to an NR payee when the actual payment is made in the subsequent tax year.

In this regard, the Ahmedabad Tribunal observed that withholding tax is a vicarious liability and is wholly dependent on the existence of tax liability in the hands of the recipient of income under the ITL.

The Tribunal observed that royalty would be taxable in the hands of the NR payee only at the time of actual payment under the IndiaItaly tax treaty. Therefore, the withholding tax liability in the hands of a payer would also arise at the time of actual payment and not at the time when credit is afforded in the books of account.

Further, the Tribunal permitted the adoption of a lower tax rate under the ITL, even though taxability of the income was held to be triggered on payment based on the treaty.

(Click here for EY Tax Alert dated 5 April 2017 for more details)Reebok India Company [TS-112-ITAT-2017(DEL)]

Payments made to the International Cricket Council (ICC) for acquiring advertisement, promotion and other commercial rights in relation to ICC events

The taxpayer, an Indian company, entered into the an agreement with ICC for granting promotional, advertising, marketing and other commercial rights on a worldwide basis in connection with ICC events.

Under the agreement, the taxpayer was required to make two categories of payments to ICC:

1. Payments made for acquiring advertisement and promotion rights, even if it involves incidental use of logos or trademarks/brand names of ICC (ICC marks)

2. Payments made solely for the use of ICC marks in the manufacture and sale of licensed products

The issue before the Delhi Tribunal was on the taxability of the above-mentioned payments by the taxpayer to ICC under the ITL.

The Delhi Tribunal held that payments made for acquiring advertisement and promotion rights, even if it involves incidental use of ICC marks, will not qualify as royalty under the ITL. In this regard, the Tribunal relied on the Delhi HCs decision in the case of Sheraton International Inc. [135 ITD 373], wherein it was held that the use of trademark, trade name etc. in rendering advertisement, publicity and sales promotion services is in the nature of neither royalty nor FTS and hence not taxable in India.

However, the Tribunal held that payments made solely for the use of ICC marks in the manufacture and sale of licensed products qualify as royalty under the ITL and were taxable in India.


Recent decisions on taxation of royalty/fees for technical services (FTS) payments

Summarized below are some decisions on royalty and FTS, also considering relevant treaty provisions:

http://www.ey.com/Publication/vwLUAssets/royalty_withholding/$FILE/royalty_withholding.pdfhttp://www.ey.com/Publication/vwLUAssets/advert_trademark/$FILE/advert_trademark.pdf

18 Tax Digest



Ruling

A.P. Moller Maersk A S [TS-70-SC-2017]

India-Denmark treaty

Income received from Indian agents for use of global telecommunication facility

The taxpayer, a Danish resident company engaged in the shipping, chartering and related business, had appointed agents in various countries (including India) for booking of cargo and servicing customers in the respective countries, preparing documentation, acting as clearing agents etc.

The taxpayer had set up a centralized telecommunication facility that enabled the agents to access information such as tracking of cargo of a customer, transportation schedule, customer information, documentation and several other kinds of information.

The issue under consideration was whether income received from Indian agents for use of such global telecommunication facility can be classified as FTS under the India-Denmark tax treaty.

In this regard, the SC held that the payment made was not in the nature of FTS as no technical services were rendered and the payments were toward using a common facility provided to all the agents.

Furthermore, based on the fact that all expenses incurred on setting up and maintaining the system were shared among all the agents on a proportionate basis, it was held that the payments were not taxable in India as they were merely cost reimbursements.

(Click here for EY Tax Alert dated 27 February 2017 for more details)

Marck Biosciences Ltd. (80 taxmann.com 275-Ahd)

India-US treaty

Payment of professional fee for global biopharmaceutical strategic counselling and advisory services

The taxpayer, an Indian entity, made payment to a US company (US Co.) toward professional fee for global biopharmaceutical strategic counselling and advisory services.

US Co. had gained information for providing such services through its own experience in the pharmaceutical industry.

The tax authorities contended that services rendered by US Co. qualified as royalty under the India-US tax treaty.

The Ahmedabad Tribunal held that while characterizing the nature of payment, the relevant factor is the activity that triggers payment of consideration. The Tribunal observed that, in this case, the payment was for rendition of services and not for the right to use any information concerning industrial, commercial or scientific experience in possession of US Co. Accordingly, it was concluded that the payment did not qualify as royalty.

The Tribunal also held that the payment was not covered under fees for included services as the make available condition was not satisfied.

http://www.ey.com/Publication/vwLUAssets/SB_FTS/$FILE/SB_FTS.pdf

19 Tax Digest



Ruling

Marks & Spencer Reliance India Pvt. Ltd.

[TS-178-HC-2017(BOM)]

India-UK treaty

Reimbursement of salary expenditure of employees deputed to India to carry out functions in the areas of management, setting up of business, property selection and retail operation etc.

The taxpayer, an Indian company, was a joint venture between a UK company (UK Co.) and another Indian company. UK Co. entered into a service agreement with the taxpayer under which it provided personnel to the taxpayer to carry out the functions in the areas of management, setting up of business, property selection and retail operation etc. The taxpayer reimbursed UK Co. for salary and other expenditure incurred on the personnel deputed to the taxpayer.

The tax authority noticed that the taxpayer had made payments to UK Co. without deducting any taxes. It contended that payment was in the nature of business strategies and advisory and hence qualified as FTS.

The Mumbai Tribunal held in favor of the taxpayer that since the make available clause under the India-UK tax treaty was not satisfied, the impugned payments did not qualify as FTS under the tax treaty.

Further, the Tribunal also held that payments made by the taxpayer to UK Co. were merely reimbursement of expenses, and hence there was no requirement to withhold taxes on the payments.

Aggrieved, the tax authority appealed before the Bombay HC. However, the HC upheld the decision of the Tribunal based on the fact finding of the Tribunal.

Burt Hill Design (P.) Ltd. [TS-127-ITAT-2017(Ahd)]

India-US tax treaty

Payment made by Indian subsidiary to its US parent in pursuance of a secondment agreement

The taxpayer, an Indian company, entered into an agreement with its US parent company (US Co.) pursuant to which US Co. seconded certain employees and put them at the disposal and control of the taxpayer.

On the issue of tax withholding on reimbursement of salary cost to US Co., the Ahmedabad Tribunal held that the taxpayer was not obligated to withhold taxes on the payments made to US Co. for the following reasons:

The payments were not covered under fees for included services as the make available condition was not satisfied.

The income embedded in the impugned payments being in the nature of salary income, the taxpayer had duly discharged its tax withholding obligations from these salaries to the extent the salary recipients were taxable in India.

As the payments to US Co. were reimbursement of salary cost, there is no taxability of that income in the hands of US Co.

20 Tax Digest



Ruling

Flughafen Zurich, AG [TS-96-ITAT-2017(Bang)]

India-Switzerland tax treaty

Amount received from Indian company pursuant to a secondment agreement

The taxpayer, a Swiss company engaged in providing operations and management services to airports, entered into an agreement with an Indian entity (I Co.) for secondment of skilled personnel whereby I Co. reimbursed the Swiss company for salary and other expenditure on employees deputed to I Co.

However, the tax authority contented that the amount received by the taxpayer was in the nature of FTS and was taxable in India.

The Bangalore Tribunal rejected the taxpayers claim that the assignees were employees of I Co. due to the following reasons:

At the time of the agreement, the assignees were under the employment of the taxpayer, and hence it was not a case of employment or recruitment by I Co.

The terms and conditions of employment of the assignees with the taxpayer cannot determine the relationship between the assignees and I Co.

The long tenure of assignment with I Co. would not amount to cessation of the existing employment of the assignees with the taxpayer

Further, the Tribunal stated that as the assignees held high management positions such as chief executive officer and chief compliance officer, they were not ordinary employees but had the expertise in the field of management and therefore the purpose of assignment was to avail the services of those highly qualified personnel.

Accordingly, the Tribunal held that the payments were covered as managerial service under the FTS definition of the tax treaty6.

6The FTS Article under the India- Swiss tax treaty does not contain a make available condition

21 Tax Digest

From the Tax Gatherers Desk

Central Board of Direct Taxes (CBDT) issues clarifications for smooth implementation of Income Computation and Disclosure Standards (ICDS)

CBDT issued a circular with certain clarifications on ICDS. ICDS are applicable from tax year 2016-17, in a revised form, pursuant to deferment by one year by CBDT in response to concerns raised by various stakeholders on implementation issues. ICDS apply to taxpayers following the mercantile system of accounting and for the computation of income chargeable under the Business7 or Other Sources8 heads. They do not apply to taxpayers who are individuals or Hindu Undivided Families, who are not liable for tax audit under the provisions of the ITL.

The circular provides clarifications on 25 issues by way of frequently asked questions. Some of the key clarifications include: (a) Interplay between ICDS and income tax rules/judicial precedents, (b) applicability of ICDS to taxpayers governed by presumptive basis of taxation or sector-specific tax provisions, (c) parity of treatment of mark-to-market (MTM)/expected gains with MTM/expected losses, (d) taxation of retention money, (e) absence of test of reasonable certainty for recognition of interest and royalty, and (f) transitional provisions for government grants and provisions/contingent assets.

(Source: Circular No.10/2017 dated 23 March 2017)


CBDT releases draft ICDS on real estate transactions

The ICDS are formulated by an Expert Committee constituted by CBDT on the basis of Accounting Standards framed by the Institute of Chartered Accountants of India (ICAI) and notified under Companies Act, 2013 for compliance by companies. Currently, CBDT has notified 10 ICDS covering diverse items such as accounting policies, inventories, revenue recognition and tangible fixed assets.

Considering that there was no mandatory accounting standard on real estate revenue recognition, the Committee recommended a separate ICDS for such transactions based on the Guidance Notes issued by ICAI on the subject. Pursuant to that, CBDT has issued a draft ICDS on real estate transactions for soliciting stakeholders comments.

As per the draft, this ICDS shall apply to real estate projects commenced on or after the effective date of applicability, Thus, it grandfathers projects that have commenced prior to such date. However, the term commenced is not defined in ICDS.

(Source: CBDT Press release dated 11 May 2017)


CBDT issues draft rules prescribing methodology for determining fair market value of unquoted equity shares

CBDT has issued draft rules for determining the fair market value (FMV) of unquoted equity shares for the purpose of new provisions inserted by the Finance Act, 2017 to curb abusive practices resulting in the avoidance of capital gains tax on transfer of shares. According to these provisions, transfer of such shares at less than the FMV triggers taxation of shortfall in the hands of both the transferor and the transferee with effect from 1 April 2017 (as against the erstwhile provision, which triggered taxation in the hands of only the transferee). The provisions delegate the methodology for the determination of FMV through rules to CBDT.

7Profits and gains from business and profession8Income from other sources

http://www.ey.com/Publication/vwLUAssets/CBDT_issues_clarifications_ICDS/$FILE/CBDT_issues_clarifications_ICDS.pdfhttp://www.ey.com/Publication/vwLUAssets/CBDT_issues_clarifications_ICDS/$FILE/CBDT_issues_clarifications_ICDS.pdfhttp://www.ey.com/Publication/vwLUAssets/ICDS_RE/$FILE/ICDS_RE.pdfhttp://www.ey.com/Publication/vwLUAssets/ICDS_RE/$FILE/ICDS_RE.pdf

22 Tax Digest

In this regard, for wider public consultation, CBDT issued draft valuation rules on 5 May 2017 for substituting the existing valuation rule for determination of FMV of unquoted equity shares for the purpose of taxation in the hands of the transferee. The same FMV would apply for taxation in the hands of the transferor of unquoted equity shares. The proposed draft rule seeks to determine the FMV of unquoted equity shares of the company by adopting the independent fair valuation of jewelry, artistic work, immovable property and shares and securities held by such company, while all other assets and liabilities of such company would continue to be valued at book value as per the existing rule.

The draft valuations rules are proposed to be made applicable from 1 April 2017 (i.e., tax year 2017-18).

Source: CBDT Draft Notification containing the draft rules


CBDT notifies cases for waiver/reduction of interest on default in withholding of taxes

Under the ITL, non-withholding or short withholding of taxes on any sum chargeable to tax in India attracts levy of mandatory interest. The CBDT issued a circular providing for waiver or reduction of interest in certain specific cases of non-withholding or short withholding, upon fulfilment of certain specific conditions. The circular authorizes the designated tax authorities9 to reduce or waive the interest chargeable on non-withholding or short withholding of tax in certain specific cases and on fulfilment of specific conditions. The tax authorities have been given the discretion to decide on the period and the extent to which the waiver or reduction in interest may be considered.

(Source: Circular No.11/2017 dated 24 March 2017)


Finance Act, 2017 enacted

The Finance Bill, 2017 was presented by the Finance Minister on 1 February 2017 and enacted into the Finance Act, 2017 with the Presidents assent on 31 March 2017. In the wake of representations received from various stakeholders, the FM introduced certain amendments at the enactment stage. Some of these key amendments are:

Retrospective exemption from indirect transfer provisions for direct or indirect investments to Category I and II foreign portfolio investors extended to erstwhile foreign institutional investors

Gift taxation not to apply to property received from an individual by a trust created or established solely for the benefit of a relative of such an individual

Interest deduction limitation to also apply to interest or similar expenditure incurred and not merely paid

First time adoption (FTA) adjustment under Ind AS to the Equity Component of Compound Financial Instruments may trigger MAT

Individual taxpayers eligible for Aadhaar enrolment to mandatorily obtain and intimate Aadhaar number to the tax authority. Non-compliance after 1 July 2017 will invalidate PAN for all purposes of the ITL

Reduction in the threshold limit for prohibited cash receipts from INR0.3 million to INR0.2 million

No TCS obligation on cash sale of jewelry, bullion or any other goods or provision of any services, but cash sales of INR0.2 million or above shall attract penalty for the seller under the reduced threshold for cash receipts

The amendments are intended to address certain ambiguities and anomalies arising from the wording of proposals as contained in the original bill, as also to further restrict cash transactions.

(Source Link: http://indiabudget.nic.in)

(Click here for EY Tax Alert dated 22 March 2017 for more details)9Chief Commissioner of Income Tax and Director General of Income Tax

http://www.ey.com/Publication/vwLUAssets/CBDT_issues_Draft_rules/$FILE/CBDT_issues_Draft_rules.pdfhttp://www.ey.com/Publication/vwLUAssets/CBDT_issues_Draft_rules/$FILE/CBDT_issues_Draft_rules.pdfhttp://www.ey.com/Publication/vwLUAssets/Indian_administration_notifies_cases_for_waiverreduction/$FILE/Indian_administration_notifies_cases_for_waiverreduction.pdfhttp://www.ey.com/Publication/vwLUAssets/Indian_administration_notifies_cases_for_waiverreduction/$FILE/Indian_administration_notifies_cases_for_waiverreduction.pdfhttp://indiabudget.nic.in/http://www.ey.com/Publication/vwLUAssets/Budget_connect_017_Enactment/$FILE/Budget_connect_017_Enactment.pdfhttp://www.ey.com/Publication/vwLUAssets/Budget_connect_017_Enactment/$FILE/Budget_connect_017_Enactment.pdf

23 Tax Digest

ITR forms for tax year 2016-17 notified

CBDT, vide a notification, has issued ITR forms for the tax year 2016-17. The said notification has also amended Rule 12 of the Income Tax Rules to modify the manner of filing of the ITR forms. While notifying the ITR forms for all categories of taxpayers for tax year 2016-17, as a measure of rationalization, the CBDT has reduced the number of ITR forms from the existing nine to seven.

Some of the important changes are (a) Simplified one-page ITR-1 form for specified individual taxpayers, (b) details of cash deposited during the demonetization period required to be reported in ITR forms by all categories of taxpayers, (c) mandatory quoting of Aadhaar number10, applicable to individuals, and (d) Increased reporting requirements of domestic specified assets and liabilities held at year end in Schedule AL for certain classes of taxpayers, including the salaried class.

(Source: Notification No. 21/2017 dated 30 March 2017)


CBDT clarifies rental income from letting out premises along with amenities in an industrial park/special economic zone (SEZ) to be taxed as business income and not as income from house property

There existed a debate as to whether the rental income earned by letting out the units developed in an industrial park/SEZ would be taxed as income under the head Profits and Gains of Business and Profession or as Income from House Property under the ITL.

The Karnataka HC in the case of Velankani Technology Park Ltd.11, as also various tribunals, had taken a view that letting of units in an industrial park/SEZ is a composite letting of premises together with specific facilities and services under the regulatory obligation on the developer and such letting is inseparable. Therefore, letting of units in an industrial park/SEZ is assessable as income from business and not house property.

CBDT has now issued a circular that is in agreement with the aforesaid decision of the Karnataka HC and clarifies that income from letting of industrial parks/SEZs established under the various schemes framed and notified under a specific provision12 of the ITL is liable to be treated as income from business provided the conditions prescribed therein are met. The circular further clarifies that the Tax Department may not file any appeal on this issue and pending appeals may be withdrawn/not pressed.

(Source: Circular No. 16/2017 dated 25 April 2017)

CBDT provides clarification on receipt-based taxation of salary income of NR seafarer

Under the ITL, generally income sourced outside India is not taxable for NRs. However, if the first receipt of income is in India, such income is taxable in India regardless of the source of the income and the individuals residence status.

Under normal shipping industry practice, seafarers receive a part of their salary in cash while on the ship, while the main portion of their salary is paid into their bank accounts in India. However, as the salary is received in an Indian bank account, despite the fact that the services are performed outside India by an NR taxpayer, such amount results in a tax liability in India.

However, following representations made by the shipping industry, CBDT has now issued a circular (Circular No. 13/2017) confirming that salary accruing to NR seafarers for services performed outside India on a non-Indian ship will not be taxable in India solely because the salary is credited to a Non Resident External Account of the employee.

(Source: Circular No. 13/2017 dated 11 April 2017)

(Click here for EY Global Alert dated 5 May 2017 for more details)

10Aadhaar number is an identification number in India issued to eligible individuals on the basis of demographic information and biometric information.11265 ITR 250 (Kar.) 12s. 80IA(4)(iii) of the ITL

http://www.ey.com/Publication/vwLUAssets/CBDT_ITRforms/$FILE/CBDT_ITRforms.pdfhttp://www.ey.com/Publication/vwLUAssets/CBDT_ITRforms/$FILE/CBDT_ITRforms.pdfhttp://www.ey.com/gl/en/services/people-advisory-services/hc-alert--india-issues-circular-confirming-tax-position-for-nonresident-seafarershttp://www.ey.com/gl/en/services/people-advisory-services/hc-alert--india-issues-circular-confirming-tax-position-for-nonresident-seafarers

24 Tax Digest

CBDT clarifies place of effective management (POEM) test not applicable for companies with gross receipts/turnover up to INR500 million

The test of residency for foreign companies under the ITL was amended in 2015 requiring POEM of the foreign company, in a given year, to be in India.

Subsequently, CBDT, vide Circular 6 of 2017 dated 24 January 2017, released the final guiding principles for determination of POEM of a foreign company in India. Along with the release of Guidelines, CBDT also issued a press release that stated that the Guidelines shall not apply to companies having a turnover/gross receipts of INR50 crore or less in a financial year.

Doubts were raised as to whether such small company exemption granted in the press release but not provided either in the law or the circular can have binding force of law. Accordingly, CBDT has issued Circular No. 8 of 2017 dated 23 February 2017 clarifying that POEM, as a test of corporate residency, under the ITL shall not apply to a company having turnover or gross receipts of INR500 million or less in a financial year.

(Please refer our flash news dated 24 February 2017)

CBDT clarifies on rescission of Cypruss status as Notified Jurisdictional Area (NJA) retrospectively

Cyprus was notified as NJA13 w.e.f. 1 November 2013 on account of lack of effective exchange of information. Notification as NJA entailed onerous consequences for transactions with a person located in Cyprus, such as application of transfer pricing (TP), increased reporting and higher withholding. Recently, a revised tax treaty was signed between India and Cyprus, which is applicable w.e.f. 1 April 201714. The revised treaty allows effective exchange of information for earlier period as well. Pursuant to the above, the Central Government, vide Notification No. 114 of 2016 dated 14 December 2016, rescinded Cypruss NJA status. The rescission is stated to be retrospectively from 1 November 2013 except as respects things done or omitted to be done before such rescission (savings clause).

Based on a reading of the saving clause, some tax authorities were of a view that rescission of Notification No. 86/2013 was not retrospective w.e.f. 1 November 2013. Therefore, for removal of doubts, CBDT issued a circular, in April 2017, clarifying that Notification No. 86/2013 has been rescinded with effect from the date of issue of the said notification, thereby removing Cyprus as NJA with retrospective effect from 1 November 2013.

(Source: CBDT Circular No. 15 of 2017 dated 21 April 2017)

13Vide CBDT Notification No. 86/2013 Refer EY Tax Alert CBDT notifies Cyprus as Notified Jurisdictional Area as an anti-avoid-ance measure dated 2 November 2013 14Refer EY Tax Alert New India- Cyprus tax treaty signed dated 15 December 2016

25 Tax Digest

Treaty updates

Protocol to treaty between India and Vietnam enters into force

The protocol amending the India-Vietnam income tax treaty (1994), which was signed on 3 September 2016, entered into force on 21 February 2017. The protocol generally applies from 1 January 2018 for Vietnam and from 1 April 2018 for India. The protocol replaces the existing article on exchange of information and inserts new article on assistance in collection of taxes.

Source: IBFD

Protocol to treaty between India and Singapore enters into force

On 23 March 2017, CBDT notified that the Third Protocol amending the India-Singapore tax treaty, which was signed on 30 December 2016, entered into force on 27 February 2017.

The protocol introduces source-based taxation of capital gains arising from the transfer of shares, effective for a transfer occurring on or after 1 April 2017. Shares acquired on or before 31 March 2017 are grandfathered and continue to qualify for the exemption, subject to satisfying the conditions in the modified Limitation of Benefit (LOB) provisions of the protocol. Transitional provisions for reduced taxation by the source country (taxation at 50% of domestic tax rates) on capital gains from the alienation of shares has also been provided for a limited period from 1 April 2017 to 31 March 2019, subject to meeting the modified LOB provisions. The protocol also provides that the treaty does not prevent a country from applying its domestic law on prevention of tax avoidance or tax evasion.

(Source: Notification No. 18/2017/ 500/139/2002-FTD-II)

(Click here for EY Tax Alert dated 31 December 2016 for more details)

Protocol to treaty between Belgium and India signed

On 9 March 2017, Belgium and India signed an amending protocol to the Belgium-India income tax treaty (1993) in New Delhi. The protocol replaces the existing articles on exchange of information and assistance in collection of taxes.

Source: IBFD

http://www.ey.com/Publication/vwLUAssets/India_Sing_Protoc/$FILE/India_Sing_Protoc.pdfhttp://www.ey.com/Publication/vwLUAssets/India_Sing_Protoc/$FILE/India_Sing_Protoc.pdf

26 Tax Digest

Happenings across the border

Organisation for Economic Co-operation and Development (OECD) Secretary-General sends tax update to G20 Finance Ministers, including International Monetary Fund (IMF)/OECD report on tax certainty

On 18 March 2017, OECD published on its website the OECDs Secretary-General Report to the G20 Finance Ministers. The report was requested by G20 leaders at the conclusion of the Hangzhou (China) Summit in 2016 and is the result of international cooperation on pro-growth tax policies and the work on tax and inclusive growth and tax certainty conducted by the OECD and the IMF.

The report was provided to the G20 Finance Ministers meeting in Baden-Baden, Germany, and it consists of two parts:

Part I of the report is an update on the latest developments in the international tax agenda, including, as an annex, the joint IMF/OECD Report on Tax Certainty

Part II is a progress report to the G20 by the Global Forum on Transparency and Exchange of Information for Tax Purposes.

At the end of the G20 Finance Ministers meeting, the G20 also released a communiqu highlighting the outcomes of the meeting. In the communiqu, the G20 confirms that it will continue working for a globally fair and modern international tax system and requests the OECD to report on the progress of Base Erosion and Profit Shifting implementation, including all four minimum standards, by the Leaders Summit in July 2017.

(Click here for EY global Alert dated 21 March 2017 for more details)

Global Forum on Transparency and Exchange of Information for Tax Purposes includes progress report to G20 Finance Ministers

The Global Forums progress report provides a high-level overview of the status of commitments on automatic exchange of information and the next steps to secure its timely implementation. The report also updates on exchange of information on request and on the

ongoing work on beneficial ownership. In the end, the report provides a summary of the technical assistance and capacity-building activities that support the implementation of the tax transparency standards by all members of the Global Forum

(Click here for EY Global Alert dated 27 March 2017 for more details)

United Nations (UN) releases 2017 update to Transfer Pricing (TP) Manual

On 7 April 2017, the UN released the second edition of its Practical Manual on TP for developing countries. In this edition, new chapters have been included on intra-group services, cost contribution arrangements and treatment of intangibles. Further, some parts of the Manual have been rearranged for clarity and ease of understanding. The reorganized Manual is divided into the following four parts:

Part A relates to TP in a global environment.

Part B contains guidance on design principles and policy considerations. This part covers the substantive guidance on the arms length principle.

Part C addresses practical implementation of a TP regime in developing countries.

Part D contains country practices from countries such as India, Brazil, Mexico, South Africa and China

Source: http://www.un.org/esa/ffd/wp-content/uploads/2017/04/Manual-TP-2017.pdf

(Refer EY Global Tax Alert The latest on BEPS 24 April 2017)

http://www.ey.com/gl/en/services/tax/international-tax/alert--oecd-secretary-general-sends-tax-update-to-g20-finance-minister-including-imf-oecd-report-on-tax-certaintyhttp://www.ey.com/gl/en/services/tax/international-tax/alert--oecd-secretary-general-sends-tax-update-to-g20-finance-minister-including-imf-oecd-report-on-tax-certaintyhttp://www.ey.com/gl/en/services/tax/international-tax/alert--global-forum-on-transparency-and-exchange-of-information-for-tax-purposes-includes-progress-report-to-g20-finance-ministershttp://www.ey.com/gl/en/services/tax/international-tax/alert--global-forum-on-transparency-and-exchange-of-information-for-tax-purposes-includes-progress-report-to-g20-finance-ministershttp://www.un.org/esa/ffd/wp-content/uploads/2017/04/Manual-TP-2017.pdfhttp://www.un.org/esa/ffd/wp-content/uploads/2017/04/Manual-TP-2017.pdf

27 Tax Digest

OECD BEPS updates

Union Cabinet of India approves signing of multilateral instrument (MI) in June 2017 for implementing tax treaty related BEPS measures

The Ad Hoc Group constituted by OECD for the development of MI to implement tax treaty related BEPS measures, adopted the text of MI on 24 November 2016. India is also one of the members of the Ad Hoc Group that have adopted MI.

MI was opened for signature on 31 December 2016 and a first joint signing ceremony is scheduled to be held in Paris on 7 June 2017. Signing of MI is the first step in the process of countries expressing consent to be bound by MI. Once signed, MI would become binding only upon ratification.

In this regard, on 17 May 2017, the Indian Union Cabinet approved the signing of MI by India in the upcoming joint signing ceremony.

Under MI, the countries are also required to provide a list of tax treaties in respect of which they wish to apply the provisions of MI as well as a list of reservations and options chosen by a country in this respect either at the time of signing of MI or at the time of depositing the instrument of ratification. It is proposed that India will make a provisional list of tax treaties and its reservations at the time of signature in June 2017 and final list will be submitted at the time of ratification. We will keep you posted on the developments through our alerts.

(Source: PIB Press release dated 17 May 2017)


OECD releases further guidance on five issues relevant for Country-by-Country (CbC) reporting implementation

On 6 April 2017, OECD released an updated version of its Guidance on the implementation of CbC reporting. The content of the Guidance has been rearranged into topics and five new questions have been added. The Guidance is divided into four areas addressing issues relating to:

1. Definition of items reported in the template for the CbC report

2. Entities to be reported in the CbC report

3. Filing obligation for the CbC report

4. Sharing mechanism for the CbC report (i.e., exchange of Information, surrogate filing and local filing)

The five new specific issues addressed in this Guidance are:

1. Definition of revenues

2. Accounting principles/standards for determining the existence of and membership in a group

3. Definition of total consolidated group revenue

4. Treatment of major shareholdings

5. Definition of related party for purposes of completing Table 1 of the CbC report

(Click here for EY Global Alert dated 7 April 2017for more details)

OECD releases CbC reporting implementation status and exchange relationships between tax administrations

On 4 May 2017, OECD provided an update on exchange relationships and CbC implementation. According to OECD, close to 45 jurisdictions have implemented an obligation for the filing of CbC reports by resident ultimate parent entities (UPEs), 10 jurisdictions have informed OECD that they will permit voluntary parent surrogate filing by the resident UPE of a multinational enterprise group, and around 45 countries will permit surrogate filing by constituent entities that are not the UPE of their group.

Source: http://www.oecd.org/tax/beps-action-13-oecd-releases-cbc-reporting-implementation-status-and-exchange-relationships-between-tax-administrations.htm


http://www.ey.com/gl/en/services/tax/international-tax/alert--indias-union-cabinet-approves-signing-of-multilateral-conventionhttp://www.ey.com/gl/en/services/tax/international-tax/alert--indias-union-cabinet-approves-signing-of-multilateral-conventionhttp://www.ey.com/gl/en/services/tax/international-tax/alert--oecd-updates-its-guidance-on-country-by-country-reportinghttp://www.ey.com/gl/en/services/tax/international-tax/alert--oecd-updates-its-guidance-on-country-by-country-reportinghttp://www.oecd.org/tax/beps-action-13-oecd-releases-cbc-reporting-implementation-status-and-exchange-relationships-between-tax-administrations.htmhttp://www.oecd.org/tax/beps-action-13-oecd-releases-cbc-reporting-implementation-status-and-exchange-relationships-between-tax-administrations.htmhttp://www.oecd.org/tax/beps-action-13-oecd-releases-cbc-reporting-implementation-status-and-exchange-relationships-between-tax-administrations.htmhttp://www.oecd.org/tax/beps-action-13-oecd-releases-cbc-reporting-implementation-status-and-exchange-relationships-between-tax-administrations.htmhttp://www.ey.com/gl/en/services/tax/international-tax/alert--the-latest-on-beps---may-8--2017http://www.ey.com/gl/en/services/tax/international-tax/alert--the-latest-on-beps---may-8--2017

28 Tax Digest

OECD releases implementation guidance on hard-to-value intangibles (HTVI)

On 23 May 2017, OECD released a discussion draft on the implementation guidance on HTVI in connection with BEPS Action 8. The discussion draft provides guidance on the implementation of the approach to HTVI.

The HTVI approach is stipulated in the final report on TP under BEPS Actions 810 and formally incorporated into the OECD Transfer Pricing Guidelines. The Discussion Draft contains three sections, which present:

1. The principles that should underlie the implementation of the HTVI approach

2. Three examples to clarify the implementation of the HTVI approach in different scenarios

3. The interaction between the HTVI approach and the access to the mutual agreement procedure (MAP) under the applicable treaty

The guidance included in the draft is aimed at reaching a common understanding and practice among tax administrations on how to apply adjustments resulting from the application of the HTVI approach.

The proposals included in the discussion draft do not represent a consensus view of the OECDs Committee on Fiscal Affairs, but were released in draft form in order to provide an opportunity for public comments, to be submitted by 30 June 2017.


http://www.ey.com/gl/en/services/tax/international-tax/alert--oecd-releases-implementation-guidance-on-hard-to-value-intangibleshttp://www.ey.com/gl/en/services/tax/international-tax/alert--oecd-releases-implementation-guidance-on-hard-to-value-intangibles

29 Tax Digest

Case Laws

Indirect TaxCustoms

Supreme Court

Appropriate remission to be granted on demurrage charges on goods imported before title acquisition

Customs Act, 1962 & Major Port Trusts Act, 1963; assessees appeal partly allowed

The assessee imported 78 shipments of zinc ingots and copper iron bars from 5 different consignees. These consignments were landed at the Port of Bombay. The bill of entry for 37 out of 78 consignments were filed. The rest of them were failed to be lifted and thus they were stored by the Port of Bombay. The consignments were shipped on CAD basis, i.e., cash against documents. In such cases, the title to the goods remains with the exporter till such a time the importer retires the documents against payments.

The consignee asked the assessee if it was interested in purchasing the goods. The assessee through its agent applied to the customs authorities to have the bill of entry substituted in its name for the 37 consignments, and also applied to file bills of entry for the remaining 41 consignments lying unclaimed. The clearing agent of the assessee wrote to the custom authorities seeking an amendment of the Import General Manifest (IGM) so that the goods could be cleared. The assessee was granted a detention certificate by the customs authorities for 41 consignments and it read as bonafide operation of ITC formalities. The Port of Bombay levied demurrage charges. Aggrieved by this, the assessee filed a writ petition, which was dismissed. Being aggrieved, the assessee filed appeal before the SC.

The assessee contended that it acquired title to the goods long after they arrived in the Port of Bombay and discharged from the vessel that had carried the goods. Thus, the demurrage payable for the period anterior to the assessees acquisition of title to the goods is to be collected from the steamer agent of the vessel and the liability should not be charged on the assessee.

The SC stated that if the act authorizes the port to recover its dues by bailing the goods under bailment in cases where the consignee does not turn up to take the delivery of goods within the time stipulated in the act, it would be

illogical and inconsistent to deny the right to demand and recover the amounts due from the consignee when the consignee seeks delivery of the goods under bailment. It further stated that denying such a right on the ground that the person claiming delivery of the goods acquired title to the goods only toward the end of the period of bailment would result in driving the port to recover t

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