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Tax DigestQuarterly newsletterJune 2016

2 Tax Digest

Editorial,Dear readers,

We are pleased to present the June 2016 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, an update 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

Concessional rate of tax on royalty and interest income according to India - Singapore DTAA

Significant Supreme Court rulings

Transaction charges paid to stock exchange for online trading facility does not constitute FTS

SC allows tax holiday on subsidies received towards reimbursement of business running costs

Tips received by waiters from customers is not salary income

Rulings on whether certain payments can be treated as payment of rent

Payments made for hotel room liable to tax withholding as rent

Mumbai Tribunal holds that payment by builders to tenants for alternate accommodation is not rent

Deductibility of expenditure

Calcutta HC allows deduction for expenses incurred on development of an application software

Payment of damages for land-encroachment allowable as deduction

Whether an abusive transaction?

Buyback transaction taxable as capital gains even if considered as dividend, tax withholding does not apply

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Rulings on tax withholding

Mumbai Tribunal rules withholding not required for reimbursement of bank guarantee commission to parent company

No tax withholding on provision for contingent interest subsequently reversed in books

Rulings on taxability of income

Kolkata Tribunal rules on taxability of subsidy as revenue in nature

Chennai Tribunal upholds salary taxation of SARs benefits received from foreign parent of employer

Corporate guarantee commission received by an NR parent not taxable in India

Bombay HC upholds non-taxability of deferred consideration on transfer of shares in the absence of accrual

Other significant decisions

Untraceable creditor doesnt amount to cessation of liability

Bombay HC allows set off of gains arising from the sale of depreciable assets against long-term capital losses

Bank ATMs eligible for increased depreciation as computer including computer software

Service tax not to be included while computing income from house property

Madras HC rules that ITL provision notifying Cyprus as non-cooperative jurisdiction is not unconstitutional

Delhi HC rules on maintainability of AAR application after receipt of assessment notice

Is there a PE?

Intimate relation with Indian affiliate results in a business connection, but such business connection does not result in forming PE for foreign entity under the DTAA.

Activities carried out by foreign companys Indian subsidiary doesnt constitute a PE in India

Is there a place of effective management?

Location of parent company in India does not create PE of its foreign subsidiary in India

Some key issues on which Special Leave Petitions were dismissed by the SC

Some decisions on Royalty and FTS, also considering relevant DTAA provisions

From the Tax Gatherers desk

CBDT issues Circular clarifying protocol regarding partnership firm under India-UK DTAA

CBDT clarifies nature of share buy-back transaction undertaken prior to 1 June 2013 as capital gains

CBDT issues circulars clarifying applicability of withholding tax on certain transactions of television channels/broadcasters

CBDT clarifies on Association of Persons (AOP) classification in EPC/ turnkey projects

CBDT issues circular on payment of interest on refund of excess taxes withheld from payment to non-resident

CBDT Committee recommends a MAT framework for Ind-AS companies

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CBDT introduces form for employee investment declarations and extends due date for quarterly withholding statements

CBDT releases report of E-Commerce Committee which recommended Equalization Levy

CBDT issues draft rules for granting foreign tax credit

CBDT issues circulars on classification of surplus from transfer of shares and securities as capital gains or business income

Treaty updates

The 2012 DTAA between India-Indonesia came into force

India and Mauritius sign protocol amending 1982 DTAA

Protocol to DTAA between Belgium and India initialed

India signed limited DTAA with Maldives in respect of taxation of income from aircraft-operation

Tax Information Exchange Agreements (TIEA) Updates

TIEA between India and Marshall Islands signed

TIEA between India and Maldives signed

Happenings across the border

German Finance Ministry issues 10 Point Action Plan against Tax Fraud, Tax Avoidance Schemes and Money Laundering

UK introduces large business special measures regime

Australian Parliament passes Bill for non-final 10% withholding tax on foreign resident capital gains

OECD: JITSIC network meets regarding Panama Papers

BEPS updates

OECD releases Country-by-Country reporting XML Schema and related User Guide

OECD releases plan to establish inclusive framework for BEPS implementation

Indirect taxCase lawsCustoms duty

High Court

Custodian of goods cannot demand warehouse charges where goods are detained by Customs Department

Non-filing of appeal against the assessed Bill of Entry will not deprive the importer of his right to file refund under Section 27 of Customs Act, 1962

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Tribunal

Assessee entitled to refund of SAD under Notification 102/2007-Cus when goods sold from SEZ to DTA

Bar of unjust enrichment not applicable in cases of refund arising out of finalization of provisional assessment

Excise duty

Supreme Court

Input credit reversible basis suppliers invoice when goods are supplied to group company

Value of returnable packing material cannot be excluded from the assessable value unless there is a formal arrangement between seller and buyer

Cost of bullet proofing carried out on jeeps after clearance from factory shall not be added to the transaction value

Tribunal Larger bench

Notional loading shall not be included in case of inter-unit transfer of goods for captive consumption

CENVAT credit

Supreme Court

The word Include in the definition of inputs should be given a wider interpretation

Tribunal

Credit not available as per Rule 7 of CCR where invoice is endorsed by a separate letter and not by way of endorsement on the body of the invoice

Duty cannot be demanded where procedural lapse does not trigger any loss to Revenue

CENVAT credit available w.r.t various services utilized for maintenance or repairs of residential colony/township relating to a manufacturing unit

CENVAT credit available on items used for manufacture of conveyor system, thickener, filtration system and electrical equipment

Refund of CENVAT credit of input services used for export of services allowed even when such services were exempt; Also held that, for refund of unutilized credit pertaining to export, when SEZ turnover was included in total turnover (denominator), same should be included in export turnover (numerator) as well

Service Tax

Tribunal

Credit notes affecting reversal of consideration and Service tax thereon amount to sufficient evidence for crossing hurdle of unjust enrichment

Authority for Advance rulings

Processing payments for a foreign service provider will qualify as an export of service.

Integrated testing of rolling stocks as part of a metro/monorail project would amount to commissioning of plant and machinery for original works and accordingly be eligible for exemption under Notification No. 25/2012-ST.

Revenue sharing from educational services is taxable but fees recovered from students will be covered under the Negative List

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VAT/CST

Supreme Court

VAT will be applicable on the goods involved in the execution of works contract

High Court

VAT applicable only if there is actual transfer of right to use goods

Anti-dumping duty on import of goods would form the part of sale price for the purpose of levy of VAT

Input Tax Credit of VAT paid on purchase of DEPB scheme cannot be availed

Sale in the course import will depend on the terms and conditions of contract and actual series of transactions

Key statutory updates

Customs

Foreign Trade Policy 2015-20

Central Excise

CENVAT credit

Service Tax

VAT/CST

Regulatory Foreign Exchange Management Act (FEMA) 1999

Liberalization in respect of receipt of consideration for transfer of shares on a deferred basis

Foreign Institutional Investment (FII)/ Foreign Portfolio Investment (FPI) investment permitted in Credit Information Companies (CICs)

Issuance of Foreign Exchange Management (Establishment of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016

RBI permitted foreign venture capital investors to invest in start-ups and other Indian companies

RBI amended Foreign Exchange (Compounding Proceedings) Rules, 2000

RBI initiated IT based system for effective monitoring of all import transactions

Acceptance of deposits by Indian companies from a person resident outside India for nomination as Director

Overseas Direct Investment (ODI)

Rationalization of Form ODI

Stringent emphasis on tracking of filing of Annual Performance Report (APR) now Part II Form ODI

Raising funds from overseas parties

Modifications in issuance of Rupee Denominated Bonds (RDBs) overseas

Modifications in External Commercial Borrowing (ECB) framework

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Foreign Direct Investment Policy

Liberalization of the foreign investment limits for Asset Reconstruction Companies (ARCs)

Guidelines for FDI in e-commerce sector - 100% FDI permitted under marketplace based model of e-commerce

In the press

Compilation of alerts

Direct Tax

Indirect Tax

Regulatory

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Whats new Useful links

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Budget 2016

Base Erosion and Profit Shifting (BEPS)

Swachh Bharat Cess; Webcast

For the latest tax insights for business leaders, read our quarterly magazine: T Magazine

Budget webcast

Tax Insights magazine

Goods and Service Tax

India Tax Webcast Series

Tax Library

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Verdicts!

Direct taxReported decisions supported by our Litigation team

Concessional rate of tax on royalty and interest income according to India-Singapore DTAA

In the case of Imerys Asia Pacific Pvt. Ltd. [TS-226-ITAT-2016(PUN)], the taxpayer entered into a know-how license agreement with a UK company (UK Co). On the basis of the agreement, the taxpayer sub-licensed certain know-how to a group company (I Co1) in India and earned royalty income. Furthermore, the taxpayer granted External Commercial Borrowing (ECB) loan to another group company (I Co2) in India. The taxpayer had earned royalty and interest income from I Co1 and I Co2, respectively, against which taxes were withheld at concessional rates of 10% and 15%, respectively according to India-Singapore double tax avoidance agreement (DTAA). The tax authority denied DTAA benefits to taxpayer on royalty income on the ground that the taxpayer is a conduit company and not the beneficial owner of income.

The Tribunal observed that the taxpayer is an operational company in Singapore considering the significant quantum of revenue, assets and liabilities from its various business activities. The Tribunal held that the taxpayer is a beneficial owner of royalty income noting the facts that taxpayer was well-equipped with expert personnel to transfer the know-how and, hence, was not a conduit company or company acting as an agent of UK Co. Furthermore, in respect of interest income, the Tribunal took note of the fact that ECB loan was granted to I Co2 out of taxpayers own funds and hence, it was held to be the beneficial owner of interest income received from I Co2.

Significant Supreme Court rulings

Transaction charges paid to stock exchange for online trading facility does not constitute FTS

In a batch of appeals with the lead case being that of Kotak Securities Ltd. [Civil Appeal No. 3141 of 2016 dated 29 March 2016], the issue before the Supreme Court (SC) was whether transaction charges paid to Bombay Stock Exchange (BSE) by its members constitutes FTS subject to withholding under Income tax laws (ITL). The SC ruled that services rendered by the BSE were not technical services

as they did not satisfy the test of specialized, exclusive or the individual requirement of members. The SC held that services rendered by the BSE were similar to a facility provided for transacting a business rather than a technical service. Accordingly, the transaction charges paid to the BSE do not constitute FTS and, therefore, are not subject to withholding tax.

(Refer, EY Alert dated 31 March 2016)

SC allows tax holiday on subsidies received toward reimbursement of business running costs

In the case of Meghalaya Steels v. CIT [TS-124-SC-2016], the taxpayer received subsidy from the Government as reimbursement of certain running costs incurred in the business. The issue before the SC was whether such subsidies will qualify for profit-linked incentive deduction under the ITL, which is available in respect of profits derived from industrial undertakings set up in certain industrially backward areas. The SC held that the subsidies received by the taxpayer had a direct nexus with the profits of the eligible industrial undertaking of the taxpayer and since all the subsidies were toward reimbursement of actual costs of manufacture/sale of the products of the taxpayer, the same were eligible for the profit-linked deduction under the ITL.

Tips received by waiters from customers is not salary income

In the case of ITC Ltd. v. CIT (TDS) [TS-225-SC-2016], the issue before the SC was whether the tips received by waiters of hotels from customers is taxable as Salary Income or Income from Other Sources for determining tax withholding obligation of hotels . The SC held that, since the tips are received voluntarily from customers and waiters had no vested right (as employees) against the employer (hotel) to claim any such amount, it did not constitute salary income. The SC further noted that employer merely acted in a fiduciary capacity as a trustee for payments that were received from customers, which, in turn, were disbursed to their employees for services rendered to the customer. Accordingly, income was not salary income but income from other sources and consequently employer had no obligation to withhold tax on such payment made to employees.

(Refer, EY Alert dated 28 April 2016)

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Rulings on whether certain payments can be treated as payment of rent

Payments made for hotel room liable to tax withholding as rent

In the case of Apeejay Surrendera Park Hotels Ltd. & anr, Federation of Hotel and Restaurant Associations of India and ors v. Union of India [TS-153-HC-2016(DEL)], the issue before the Delhi High Court (HC) was whether tax withholding was required under the ITL for payments made for hotel room tariff. The taxpayers filed a writ petition before the HC against a circular issued by the Central Board of Direct Taxes (CBDT) wherein it was clarified that the tour operators/travel agents were required to withhold taxes while making payments to hotels on behalf of foreign tourists, since the same constitutes rent. The HC held that the word rent has to be interpreted widely and not confined to payments received towards a lease, sub-lease or tenancy or transactions of such like nature. The HC clarified that even where the room charges collected by a hotel from its customer is not only confined to the use of the space but also to a host of facilities and amenities, such payment will still fall within the ambit of rent. The HC, therefore, held that payments made to hotels for hotel room tariff by tour operators/travel agents will require tax withholding as rent payment under the ITL.

Mumbai Tribunal holds that payment by builders to tenants for alternate accommodation is not rent

In the case of Sahana Dwellers Pvt. Ltd. v.. ITO [TS-127-ITAT-2016(Mum)], the taxpayer was awarded a contract by the Mumbai Municipal Corporation to demolish and construct a new building in its place. According to the terms of the contract, the taxpayer was required to provide compensation to the tenants for alternate accommodation until the building was constructed. The Mumbai Tribunal held that the payment made by the taxpayer does not come within the purview of rent as prescribed under the tax withholding provision of the ITL, since the taxpayer is

not making a payment for use of any land, building etc. The Tribunal, therefore, concluded that the whole payment made by the taxpayer is nothing but in the nature of compensation and, hence, taxpayer was not required to withhold taxes on such payment.

Deductibility of expenditure

Calcutta HC allows deduction for expenses incurred on development of an application software

In the case of Indian Aluminium Company Ltd. v. CIT [TS-185-HC-2016(CAL)], the issue before the Calcutta HC was whether expenditure incurred on development of an application software could be allowed as revenue expenditure. In this case, the taxpayer was engaged in manufacture of aluminum and related products, and it had incurred an expenditure on software development. The taxpayer treated the same as deferred revenue expenditure in its books of accounts. The tax authority contended that the amount spent was for the purpose of obtaining an asset or advantage of a permanent nature and, hence, the development expenditure was capital in nature.

The HC noted that software developed by the taxpayer was an application software for efficiently carrying out mining activity and observed that application software is distinct from system software, since it has to be constantly updated due to rapid advancements in technology and increasing complexity of the features. Relying on the rulings of Delhi HC in the case of Asahi Safety Glass Ltd. (Delhi) [(2012) 346 ITR 329], Karnataka HC in the case of IBM India Ltd. [(2013) 357 ITR 88], SC in the case of Empire Jute Co. Ltd. [(1980) 124 ITR 1] and Alembic Chemical Works Co. Ltd. [(1989) [177 ITR 377], the HC held that software industry is considered to be a field where advancements take place rapidly and where technology, which was once the state-of-theart, becomes obsolete in a short time. The HC, therefore, concluded that it is difficult to attribute any degree of endurability even to system software, let alone application software and allowed the expenditure to be treated as revenue in nature.

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Payment of damages for land-encroachment allowable as deduction

In the case of Mundial Export Import Finance (P) Ltd. v. CIT [TS-181-HC-2016(CAL)], the taxpayer acquired a plot of land by way of lease from Calcutta Port Trust (CPT). However, the taxpayer also encroached adjacent land in violation of the terms and conditions of the lease agreement. The taxpayer, therefore paid damages to CPT in respect of the same, in addition to a proposal to grant lease in respect of the encroached land from a future date. The issue before the Calcutta HC was whether the payment made as damages for the encroachment of land can be allowed as revenue expenditure.

The Calcutta HC held that the payment made by the taxpayer was in the nature of compensation to the land owner (CPT) for the encroachment of land and was not in the nature of penalty. The Calcutta HC further held that the payment was not capital in nature, since payment was compensatory for the benefit already received by the taxpayer, for the use of the land, which had nothing to do with a grant of lease in future. Such payment was allowed as revenue expenditure under the ITL.

Whether an abusive transaction?

Buyback transaction taxable as capital gains even if considered as dividend, tax withholding does not apply

In the case of Goldman Sachs (India) Securities Pvt. Ltd. v. ITO [TS-72-ITAT-2016(Mum)], the issue before the Mumbai Tribunal was whether a transaction of buy-back of shares was a colorable device, with the objective of avoiding payment of dividend distribution tax (DDT) in India. In this case, the taxpayer was a wholly owned Indian subsidiary of a Mauritian parent. The taxpayer had undertaken a buyback transaction and remitted the proceeds to its only shareholder in Mauritius. The tax authority regarded such buyback as capital reduction and the amount remitted as distribution of accumulated profit, which was taxed as dividend in the hands of the recipient

Mauritian shareholder. As the taxpayer had not paid DDT or withheld any taxes on such payment, the taxpayer was treated as a taxpayer-in-default.

The Tribunal ruled that the amount remitted under the buyback transaction was taxable as capital gains and as the shareholder was a resident of Mauritius, such capital gains was exempt from taxation in India under Article 13 of the India-Mauritius DTAA. The Tribunal held that the transaction of buyback is distinguishable from that of capital reduction and the same is not subject to DDT in India. Furthermore, if a taxpayer enters into a transaction, which does not violate any provision of the ITL, the transaction cannot be termed as a colorable device merely because it results in non-payment or reduced payment of taxes in that year.

(For more details refer EY Tax Alert dated 17 February 2016)

Rulings on tax withholding

Mumbai Tribunal rules withholding not required for reimbursement of bank guarantee commission to parent company

In the case of Neo Sports Broadcast Pvt. Ltd. v. CIT (TDS) [TS-218-ITAT-2016(Mum)], the issue before the Mumbai Tribunal was whether taxpayer was required to withhold taxes on Bank Guarantee Commission (BGC) reimbursed to the parent company. In this case, the taxpayer was engaged in the business of telecasting live cricket matches. The parent company of the taxpayer acquired from the Board of Control for Cricket in India (BCCI), the telecast rights of cricket matches played in India and provided bank guarantee to BCCI. The parent company, thereafter, transferred the telecast rights to the taxpayer on the condition that 80% of the BGC paid by the parent company to the banks will be reimbursed by the taxpayer.

Relying on the Madras HCs ruling in the case of Viswapriya Financial Services (258 ITR 496), tax authority held that the reimbursement of guarantee commission to the parent company was in the nature of interest under the ITL and hence, the taxpayer was required to withhold taxes on BGC reimbursed to the parent company.

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The Tribunal relied on the CBDT notification no.56 of 2012 and held that withholding is not required on various commission paid to the bank including bank guarantee under any provisions of the ITL. The Tribunal further held that in the current case no debt was incurred and the payment made by the taxpayer to its parent company was reimbursement of expense and, hence, no withholding was required under the provision of the ITL.

No tax withholding on provision for contingent interest subsequently reversed in books

In the case of Karnataka Power Transmission Corporation Ltd. v. DCIT [TS-51-HC-2016(KAR)], issue before the Karnataka HC was whether the taxpayer had any withholding obligation on the provision made in books for contingent interest on delayed payments to vendors, which was reversed in subsequent years. Noting the fact that liability was contingent in nature and the taxpayer had not claimed deduction for the provision from its taxable income, the HC held that there was no withholding obligation on the taxpayer since the liability had not crystallized in favor of payees. The HC held that withholding obligation applies to provision or payment of interest, which represents income in the hands of the payee and since, in the present case, no interest was payable to vendors by virtue of reversal entries, there was no liability to withhold tax as no income accrued to the vendors.

Rulings on taxability of income

Kolkata Tribunal rules on taxability of subsidy as revenue in nature

In the case of Limtex Tea & Industries Ltd. v. ACIT [TS-84-ITAT-2016 (Kol], the taxpayer was a company engaged in the business of manufacturing tea. The taxpayer received a subsidy from the Government, for quality upgrade and product diversification. Subsidy was granted basis 25% of actual cost of machinery purchased by the taxpayer.

After noting that the primary object of the subsidy was to improve quality of tea, increase volumes, diversify product range, improve packaging etc., the Tribunal held that the

subsidy received was revenue in nature.

The Tribunal further held that prior to the amendment in the definition of income by Finance Act, 2015 specifically making subsidy-related to non-depreciable asset taxable, if a subsidy is regarded as revenue subsidy, it will be taxable as income as well as the value of subsidy will go to reduce from actual cost of depreciable assets in terms of the provision of the ITL if specified conditions are fulfilled.

Chennai Tribunal upholds salary taxation of SARs benefits received from foreign parent of employer

In the case of Soundarrajan Parthasarathy and Kummathi Rameswar Reddy v. DCIT [TS-252-ITAT-2016(CHNY)], the issue before the Chennai Tribunal was whether the Stock Appreciation Rights (SARs) received by employees of an Indian company (I Co) from a foreign parent based in the US (US Co) was taxable in the hands of the employees (taxpayers) in India. In this case, the taxpayers were non-residents (NRs) in India and rendered services outside India during the vesting period of the SARs, but were residents of India when the SARs were exercised by them. The Tribunal held that the benefits were not in the nature of capital gains arising from transfer of any capital asset. Furthermore, although the benefits were not received directly from the employer (I Co), they were paid for services rendered to I Co as compensation (in addition to salary income) by US Co, which was interested in I Cos business. Accordingly, the Tribunal concluded that the benefits were taxable in India as salary income in the hands of the employees (taxpayer) considering the fact that at the time of exercising SARs benefits, the employees were resident in India even though they were NRs during the vesting period.

(Refer, EY Alert dated 11 May 2016)

Corporate guarantee commission received by an NR parent not taxable in India

In case of Capgemini S.A. [TS-177-ITAT-2016(Mum)], the Tribunal held that the corporate guarantee commission received by the taxpayer was not taxable in India under the other income article of the India-France DTAA. The

13 Tax Digest

income did not arise in India as the corporate guarantee agreement was executed outside India and both the parties to the corporate guarantee were situated outside India. Since income did not arise in India, the same was not taxable under the other income article of the DTAA.

Bombay HC upholds non-taxability of deferred consideration on transfer of shares in the absence of accrual

In the case of CIT v. Hemal Raju Shete (ITA No. 2348 of 2013), the issue before the Bombay HC was on taxability of capital gains on the sale of shares, when a part of the consideration of the shares was receivable in the future, subject to occurrence of contingency. In this case under the agreement to sell, the taxpayer and her family members (sellers) transferred shares of the company to the purchaser against payment of consideration, payable upfront. Additionally, the agreement contemplated the entitlement of the sellers to additional consideration payable over a period of four years, based on the profitability of the company whose shares were the subject matter of transfer. This was however, subject to the covenant that aggregate consideration was not to a specified amount. The tax authority levied capital gains with respect to the consideration of specified maximum amount, rejecting the taxpayers claim to compute capital gains with respect to the amount actually due and received in the year of transfer.

The HC held that deferred consideration, which is linked to the future performance of the company, is dependent upon uncertain events, which is contingent and has not accrued in the year of execution of the agreement. No part of the deferred consideration is, therefore, chargeable to tax in the year of execution. Furthermore, the HC also accepted taxability of deferred consideration as capital gain income in the respective year of accrual.

(For more details refer EY Tax Alert dated 18 April 2016)

Other significant decisions

Untraceable creditor doesnt amount to cessation of liability

In the case of CIT v. Alvares and Thomas [TS-222-HC-2016(KAR)], the issue before the Karnataka HC was

whether credit balance in respect of an untraceable creditor will amount to cessation of liability. Under the provisions of the ITL, where a taxpayer has been allowed a deduction in respect of trading liability in earlier years and during the relevant year, the taxpayer has obtained any benefit in respect of such trading liability by way or remission or cessation of such liability, then such benefit will be taxable in the year of cessation. The Delhi HC relied on the ruling in the case of Vardhman Overseas Ltd. [TS-777-HC-2011(DEL)] and held that the provision relating to cessation of liability cannot be invoked unless there was some material evidence on record either for cessation or remission of liability by the creditor. The Delhi HC further explained that cessation of liability had to be cessation in law, of the debt to be paid by the taxpayer to the creditor. In the present case, where creditor is not traceable, it cannot be said that the liability had ceased. The HC further noted that even if the liability had ceased, the benefit was not taken by the taxpayer in respect of such trade liability and, hence, the provision relating to cessation of liability cannot be invoked.

Bombay HC allows set off of gains arising from the sale of depreciable assets against long-term capital losses

In the case of CIT v. Parrys (Eastern) Pvt. Ltd. [TS-90-HC-2016(BOM)], the issue before the Bombay HC was whether long-term capital loss could be set off against the gains arising from the sale of depreciable assets, which are transferred after three years. Under the ITL, the gains arising from the sale of depreciable assets is deemed to be short term in nature and short term capital gains cannot be set off against long-term capital loss. Referring to the co-ordinate bench ruling in the case of ACE Builders (P) Ltd. [281 ITR 210], the HC ruled that the deeming fiction in the case of depreciable assets is restricted only to the mode of computation of capital gains and it does not change the character of the capital gain from that of being a long-term capital gain. Hence, the HC allowed the set off of long-term capital loss against the sale of depreciable asset, which due to fiction of law, is charged as short-term capital loss/gain.

Bank ATMs eligible for increased depreciation as computer including computer software

In the case of The Royal Bank of Scotland N.V. v. DDIT [TS-205-ITAT-2016(Kol)], the issue before the Kolkata

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Tribunal was whether ATMs are eligible for depreciation at the rate of 60% available for Computers including Computer Software as given in Income Tax Rules, 1962. The Tribunal noted that, the ATM machine is doing logical, arithmetic and memory functions by manipulations of electronic magnetic or optical impulses giving debit or credit cash and thereafter dispensing the case and giving a printed receipt. The Tribunal, therefore, concluded that ATM machines are eligible for increased depreciation of 60%, since computer is an integral part of ATM machine and on the basis of the information processed by the computer in the ATM machine, the mechanical functions of the dispensation of cash or deposit of cash is done. The Tribunal relied on the Delhi Tribunals decision in the case of DCIT vs Global Trust Bank Ltd. (TA No. 474/Del/2009) and Bombay HCs decision in the case of CIT v. Saraswat Infotech Ltd. (ITA No. 1243 of 2012).

Service tax not to be included while computing income from house property

In the case of Anil Gupta v. ACIT [TS-243-ITAT-2016(CHANDI)], the Chandigarh Tribunal noted that service tax is a tax levied by a service provider on the person availing the services. The service provider collects the service tax from the service receiver and then remits the same back in the government treasury. The Tribunal thus concluded that there is no element of income in the amount of service tax and, hence, the same is not to be included while computing income from house property.

Madras HC rules that ITL provision notifying Cyprus as non-cooperative jurisdiction is not unconstitutional

In the case of T. Rajkumar & others v. Union of India [TS-197-HC-2016(Mad)], the Madras HC adjudicated on the constitutional validity of Section 94A of the ITL in view of the India-Cyprus DTAA. Section 94A grants power to the Government of India to specify any country as a notified jurisdictional area (NJA) with regard to the lack of effective exchange of information (EoI) by such country. Cyprus was notified as NJA in 2013, under Section 94A of the ITL. The

HC held that Section 94A is constitutionally valid and there is no bar to notify a jurisdiction as an NJA merely because there is a DTAA in effect with such a jurisdiction.

The HC further held that if the purpose of the DTAA is defeated due to lack of EoI, the breach is by the defaulting party (Cyprus), and in such a case, the other party (India) is not prevented from taking recourse to its domestic law to address the issue. Section 94A is not in conflict with the provisions of the India-Cyprus DTAA on EoI and Mutual Agreement Procedure (MAP), since it governs different circumstances. The HC also rejected the taxpayers arguments regarding applicability of Section 94A being restricted to non-DTAA countries.

It may be noted that SC has admitted taxpayers special leave petition (SLP) against Madras HCs verdict.

(Refer, EY Alert dated 14 April 2016)

Delhi HC rules on maintainability of AAR application after receipt of assessment notice

In the case of Hyosung Corporation v. The Authority for Advance Rulings and Anr [TS-77-HC-2016(Del)], the issue before the Delhi HC was whether an application could be made to the Authority for Advance Rulings (AAR) post filing of return of income (ROI) and post receipt of notice from the tax authority. One of the mandatory conditions for admitting the application by the AAR is that the AAR shall not admit an application where the question raised in the application is already pending before any tax authority. The HC held that where the tax authority had, before the date of filing of the AAR application, already sent a detailed questionnaire to the taxpayer, including on the question raised in the application, it amounts to the question being already pending before the tax authority, creating a bar in admitting of the AAR application. However, the mere fact that a standard pre-printed notice to assess the ROI is issued by the tax authority before the date of filing of the AAR application would not result in pendency of the question raised in the application before the tax authority.

(For more details refer EY Tax Alert dated 22 February 2016)

15 Tax Digest

Is there a PE?

Intimate relation with Indian affiliate results in a business connection, but such business connection does not result in forming PE for foreign entity under the DTAA

In case of Vertex Customer Management Ltd. [TS-115-ITAT-2016(DEL)], the taxpayer was a UK-based company, which had certain contracts with overseas clients and the same were sub-contracted to its Indian subsidiary (Vertex India). Vertex India was engaged only in providing services to overseas customers of the taxpayer and the taxpayer assumed all the major risks from transactions. The taxpayer allowed Vertex India to use certain equipment located outside India, and claimed reimbursement of expenses incurred on behalf of Vertex India. The tax authority held that the taxpayer had PE in India and due to the business connection, the profit attributable to PE is taxable in India.

The Tribunal held that the taxpayer has business connection in India, since it had business activities with Indian entity and there was real and intimate relationship between activities of taxpayer outside India and those inside India.

However, the Tribunal observed that the taxpayer had no right to occupy premises in India but was merely given access for purposes of works. Hence, it held that the disposal test was not satisfied and taxpayer did not have a fixed place PE in India in terms of India-UK DTAA. Moreover, since the tax authority could not provide any evidence that expatriate employees of taxpayer were present in India for providing any services, it was held that taxpayer did not have a service PE in India.

Activities carried out by foreign companys Indian subsidiary doesnt constitute a PE in India

In case of Nortel Networks India International Inc. [TS-241-HC-2016(DEL)], taxpayers subsidiary, Nortel India, had negotiated and entered into three contracts with Reliance Infocom (Reliance) for equipment supply. On the same date, Nortel India entered into an agreement with 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 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 taxpayers behalf. The HC also observed that offices of Nortel India were not at taxpayers disposal and no services were performed by Nortel India on taxpayers behalf. Accordingly, it dismissed the allegation that taxpayer had a fixed place PE or service PE in India.

Furthermore, the HC stated that in order to conclude that Nortel India constitutes a Dependent Agent Permanent Establishment (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 absence of any such evidence, the HC held Nortel India did not constitute DAPE of the taxpayer in India. Also, on perusal of services contract, the HC noted that installation, commissioning and testing were performed by Nortel India on its own behalf and not on behalf of taxpayer. Therefore, it was held that taxpayer did not have an installation PE in India.

Moreover, HC held that the taxpayer has received only the consideration for the equipment manufactured and delivered overseas; hence, no part of taxpayers income will be chargeable under the ITL, since no income portion could be attributed to operations in India.

Is there a place of effective management?

Location of parent company in India does not create PE of its foreign subsidiary in India

In case of Forbes Container Line Pte. Ltd. [TS-126-ITAT-2016(Mum)], the taxpayer was a Singapore companyv engaged in business of operating ships in international traffic across Asia and the Middle East. The Mumbai Tribunal held that the income earned by the taxpayer from container services cannot be treated as income arising from the shipping business as the taxpayer did not own or charter or take on lease any vessel or ship and was only providing container services to various clients. Therefore, the income of the taxpayer has to be assessed under

16 Tax Digest

business income article of India-Singapore DTAA.

Furthermore, the Tribunal noted that the taxpayer maintained its bank account and books of accounts in Singapore. The Tribunal also took into account all the email correspondences submitted by the taxpayer. Considering all these factors, it was held that the effective management and control of the company cannot be said to be in India. The Tribunal clarified that factors such as stay of one of the directors in India or holding of one meeting during the year in India or the location of parent company being India will not decide the residential status of the taxpayer. Accordingly, the Tribunal held that income was liable to be taxed as business income but in absence of PE no income was taxable in India.

17 Tax Digest

Some key issues on which SLP were dismissed by the SC

Citation Particulars Ruling of HC

CIT v. Maharashtra State Electricity

[TS-220-SC-2016]

Tax authority preferred an appeal against Bombay HCs ruling that payment for transmission/wheeling charges was neither rent nor Fees for Technical Services (FTS)

The taxpayer, a State electricity distribution company, entered into Bulk Power Transmission Agreement (BPTA) with another electricity company for transmission of electricity and made payments for use of transmission system from generation point to distribution point across different regions.

The tax authority contended that the payment by the taxpayer should be taxed either as rent or as FTS and hence, the taxpayer was required to withhold tax on the payments made toward such transmission/wheeling charges.

The Bombay HC held that transmission charges cannot be termed as rent for the reason that the payment was not made to utilize any identified equipment or machinery or plant, land, building, furniture. The HC also held that, since the taxpayer did not have possessory control over the assets used for transmission, the payments made cannot be termed as rent.

The HC further held that the payment for transmission could not be held as FTS, since no services were being rendered to the taxpayer.

Dinesh Ranka v. CIT

[TS-211-SC-2016]

Tax authority preferred an appeal against Karnataka HC order, which had held that surrender of Floor Area Ratio (FAR) relating to land, in favor of developer for construction of flats, amounts to transfer liable to capital gains tax.

The issue before the Karnataka HC was whether surrender of FAR relating to land in favor of developer for construction of flats, amounts to transfer under the provisions of ITL, and hence, liable to capital gains tax.

The taxpayer contented that FAR is not a capital asset, and hence, amount received upon surrender of FAR is a non-taxable capital receipt.

The HC held that the right to construct additional stories on account of increase in available floor space index is a capital asset and an assignment of the same is a capital receipt.

(For details of HC ruling, refer September 2015 edition of the Tax Digest)

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Summarized below are some decisions on Royalty and FTS, also considering relevant DTAA provisions:

Case Law Payment Description Ruling

Capgemini Business Services (India) Ltd v. ACIT [TS-100-ITAT-2016(Mum)]

Purchase of Shrink-wrapped software

The tax authority alleged that accounting software purchased by the taxpayer from a Singapore entity amounted to purchase of right to use the software, which was used for business purpose in India, and hence, the same was taxable as royalty in India.

The Tribunal held that taxpayer simply purchased copyrighted work embedded in CD-ROM, which would qualify as sale of copyrighted product and not transfer of copyright/right therein.

Tribunal extensively analyzed provisions of the Copyright Act, 1957 and stated that taxpayers entitlement to the fair use of work/ product including making copies for temporary purpose for protection against damage/loss even without a license provided by the owner would not constitute infringement of any copyright.

Furthermore, the Tribunal stated that sale of such a CD ROM/diskette is not a license but it is a sale of a copyrighted product.

The Tribunal therefore, concluded that the purchase of shrink-wrapped accounting software from Singapore entity does not constitute royalty under the India-Singapore DTAA.

Datamine International Ltd. [TS-130-ITAT-2016 (DEL)]

Sale of software In this case, the taxpayer was a UK resident company, which had a branch office as PE in India. The taxpayer was a distributor of datamining softwares developed by its UK group company (UK Co).

The tax authority treated revenue earned by taxpayer from sale of software to end-users as royalty, which was subjected to tax accordingly.

The Tribunal accepted taxpayers contention that it had merely purchased shrink-wrapped software or off-the-shelf software from UK Co without any right to use copyright of such software. All intellectual property rights to products remained with UK Co and taxpayer could not use it or pass it over to anyone except by way of sale of software products.

The Tribunal also noted that royalty definition under India-UK DTAA do not include consideration for use of computer software.

Furthermore, the Tribunal held that retrospective amendment to the ITL, which included consideration for right to use a computer software within the ambit of royalty could not be read into DTAA, as the provisions of DTAA cannot be altered by a country unilaterally.

The Tribunal, accordingly, concluded that taxpayers revenue from software sale will be taxable as business profits and not royalty income under India-UK DTAA.

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Gujarat Pipavav Port Ltd. [TS-172-ITAT-2016 (Mum)]

Payment for rendering installation and commissioning services / payment for review of designs

A Chinese company supplied cranes to the taxpayer and also rendered installation and commissioning services, after sale services and supply of spare parts in relation to such cranes.

The Tribunal noted that all of these services were intrinsically connected to the sale of goods (i.e., cranes in this case), and hence, same could not be treated as FTS under the India-China DTAA and would constitute part of business income.

For evaluation of PE of the Chinese company, the Tribunal held that actual number of days of employees stay in India was relevant and not the entire contract period. As the stay was below the 183 days threshold, the Tribunal held that payment was not taxable in absence of PE in India.

Separately, the taxpayer had engaged a US entity for rendering of engineering services to review predetermined design and construction audit.

The Tribunal observed that the US company neither transferred any skill or knowledge nor did it transfer any technical plan/design to the taxpayer; hence, payment will not fall under the purview of Fees for Included Services (FIS) under India US DTAA.

Savvis Communication Corporation [TS-192-ITAT-2016 (Mum)]

Receipt for web-hosting services

During the year under consideration, the taxpayer, a US company, was engaged in providing information technology solutions, including web hosting services to Indian entities

The tax authority alleged that fees received for web-hosting services was taxable as royalty under the ITL as well as India-US DTAA.

The Tribunal observed that the taxpayer was providing web hosting services with the help of sophisticated scientific equipment, which enabled rendition of such a service. The equipment were not even used by the service recipient (i.e., Indian entities), and hence, one cannot say that payment was made for the use of those equipment.

The Tribunal, therefore, concluded that as the fees for web hosting services received by the taxpayer cannot be said to be consideration for the use of, or right to use of, scientific equipment and hence, not taxable as royalty under the ITL or India-US DTAA.

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Interroute Communications Limited [TS-187-ITAT-2016 (Mum)]

Receipt toward international connectivity facility

The taxpayer, a UK-based company, received a payment for allowing Indian telecom operators to use its Virtual Voice Network (VVN), which is a standard facility provided by the taxpayer to various customers for connecting to third party carriers through the taxpayers port.

The Tribunal held that the payment received by the taxpayer was toward provision of services and not for the use of any scientific equipment or technology and cannot be treated as royalty under Article 13 of the India-UK DTAA.

The Tribunal further noted that the make available condition under the India UK-DTAA was not satisfied in this case, since VVN facility could not be applied by the service recipient without recourse to the taxpayer. Therefore, the payment in question did not amount to FTS as well.

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From the Tax Gatherers Desk

CBDT issues Circular clarifying protocol regarding partnership firm under India-UK DTAA

The CBDT issued Circular No. 2/2016 of 25 February 2016 clarifying that a partnership that is a resident of either India or the UK is eligible to claim benefits under the India-UK DTAA, to the extent that the income derived by such partnership is subject to tax in that country as the income of a resident, either in its own hands or in the hands of its partners.

A protocol to the India-UK DTAA had become effective in India from 27 December 2013 (notified vide Notification No. 10/2014 of 10 February 2014) as per which partnerships were excluded from the definition of the term person. Also, the term resident was amended to provide that in the case of a partnership, the term resident of the Contracting State applies only to the extent that the income derived by such partnership is subject to tax in that state as the income of a resident either in its hands or in the hands of its partners. It was understood that the term person did not cover partnerships and the provisions of the DTAA did not apply to a partnership. However, this Circular has been issued to clarify that a partnership should qualify as person under the Protocol and, hence, a partnership may claim benefits of India UK DTAA, provided certain conditions are met.

(Source : CBDT Circular No. 2/2016 of 25 February 2016)

CBDT clarifies nature of share buy-back transaction undertaken prior to 1 June 2013 as capital gains

The CBDT has issued a circular (Circular No. 3 of 2016, dated 26 February 2016) which clarifies that consideration received on buy back of shares, between the period 1 April 2000 and 31 May 2013 would be taxed as capital gains in the hands of the recipient shareholder. Accordingly, the consideration received on buy back of shares would not be taxed as dividend either in the hands of the recipient shareholder or in the hands of the distributing company so as to be subject to a dividend distribution tax.

(Source: Circular No. 3 of 2016, dated 26 February 2016)(Refer, EY Alert dated 27 February 2016)

CBDT issues circulars clarifying applicability of withholding tax on certain transactions of television channels/broadcasters

The CBDT has issued two circulars on certain transactions of television channels and broadcasters. The first one addresses payments by television channels/broadcasters/media companies (broadcasters) to production houses for content. In respect of payments made to production houses where content is developed according to specification of the broadcaster and where the copyright in the content also gets transferred to the broadcaster, withholding tax provisions concerning work contract in the ITL will apply.

The second Circular concerns transaction of fee charged or retained by advertisement companies from broadcasters for canvassing/booking advertisement slots. In such cases, the second Circular clarifies that the payment is not commission because the relationship between the parties is on a principal-to-principal basis. Therefore, there is no requirement to withhold taxes on such transactions. This circular is also applicable to print and electronic media, since the broad nature of activities is similar.

(Source: Circular No. 04/2016 and 05/2016 dated 29 February 2016) (Refer, EY Alert dated 4 March 2016)

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CBDT clarifies on Association of Persons (AOP) classification in EPC/ turnkey projects

The CBDT has issued a clarification by way of a Circular in respect of classification of AOP under the ITL. This Circular lays down the criteria, on satisfaction of which, the consortium formed by unrelated parties for execution of large infrastructure projects, particularly Engineering, Procurement and Construction contract (EPC) and turnkey projects may not be treated as an AOP for the purposes of ITL. This Circular is applicable for consortiums formed between independent/unrelated parties only.

(Source: Circular No. 7 of 2016, dated 7 March 2016)(Refer, EY Alert dated 9 March 2016)

CBDT issues circular on payment of interest on refund of excess taxes withheld from payment to NR

The CBDT has issued a circular, which deals with the issue of payment of interest by the tax authority to a resident tax deductor, on refund of excess tax deducted at source (TDS), in respect of payments made to an NR. Based on a ruling of SC in case of Tata Chemicals Ltd. [(2014) 43 taxmann.com 240], the circular clarifies that (a) a resident tax deductor is entitled to refund of any excess TDS deposited with interest and (b) interest is to be calculated from the date of payment of such excess TDS. The tax authority is directed not to press litigation on the above issue in new/existing cases.

(Source: Circular No. 11/2016 dated 26 April 2016) (Refer, EY Alert dated 28 April 2016)

CBDT Committee recommends a MAT framework for Ind-AS companies

The CBDT had set up a Committee for suggesting amendments to the ITL for the purpose of levy of book profit based Minimum Alternate Tax (MAT) on companies required to prepare financial statements according to framework of new Indian Accounting Standards (Ind-AS), which are converged form of International Financial Reporting Standards (IFRS).

The Committee was directed on 8 June 2015 to suggest framework for MAT in view of transition to Ind-AS. The Committee has suggested a three-pronged approach for

levy of MAT on the basis of book profit according to Ind-AS income statement, as below:

MAT pick up should be from the Profit & Loss (P&L) and same can be subject to upward and downward adjustments, which already exist in current MAT provisions.

Although, MAT pick up should be from P&L, items included in Other Comprehensive Income (OCI) should also be picked up for MAT levy at an appropriate point of time. Illustratively, revaluation surplus/gain can be picked for MAT at the time of realization/disposal/retirement of the asset or investment.

On first time adoption of Ind-AS, items which are directly transferred to retained earnings and are not reclassified to P&L in future should be picked up for MAT in the first year of Ind-AS adoption.

(Source: MAT Ind-AS Committee report dated 28 April 2016) (Refer EY Alert dated 2 May 2016)

CBDT introduces form for employee investment declarations and extends due date for quarterly withholding statements

The CBDT issued a notification modifying the Income Tax Rules, 1962 (IT rules) by, inter alia, (i) introducing a new form for employees to furnish details of investments/expenditure to employer for salary withholding tax purposes; (ii) extending due date for filing quarterly tax withholding statements for non-government deductors and (iii) extending time limit for payment of tax withheld on immovable property acquired from residents.

(Source: Notification No 30/2016(F. No 142/29/2015-TPL) dated 29 April 2016) (Refer EY Alert dated 4 May 2016)

CBDT releases report of E-Commerce Committee which recommended Equalization Levy

The CBDT released the report of the Committee on Taxation of E-Commerce (Committee), which recommended introduction of Equalization Levy (EL) to deal with specified digital services and facilities. In the report, the Committee had examined various tax issues arising from new business models in the digital economy, particularly in India.

The Report suggested that: (a) EL should be imposed at a rate between 6% to 8% of gross payments made to NRs for specified digital services and facilities. (b) While the liability

23 Tax Digest

to EL is on the beneficial owners of specified income, the payer of the transaction should be obliged to deduct EL. (c) EL should be levied as a final levy on a gross basis. (d) EL is not a tax on income and should be outside the purview of the ITL. (e) As EL is not a tax on income, it should also not be covered by tax treaties. (f) An exemption should be provided from income tax under the ITL in respect of specified services on which EL has been paid on the lines of exemption of capital gains, which has been subject to Securities Transaction Tax levy.

CBDT issues draft rules for granting foreign tax credit

The CBDT issued the draft rules for grant of foreign tax credit (FTC). The draft FTC rules provide for various aspects relevant to FTC claims made by an Indian resident, including the meaning of foreign taxes, year of claiming FTC, computation mechanism, restriction on MAT credit etc. As a measure of safeguard, the draft FTC rules also provide a list of mandatory documents to be furnished by the taxpayer for claiming FTC.

(Source: CBDT Press Release dated 18 April 2016) (Refer, EY Alert dated 19 April 2016)

CBDT issues circulars on classification of surplus from transfer of shares and securities as capital gains or business income

The CBDT issued a Circular on taxability of surplus on shares and securities either as capital gains or business income. The Circular instructs tax authority to consider the following guidelines in holding whether the surplus generated from sale of listed shares and other securities will be treated as capital gain or business income:

a) Where taxpayer opts to treat listed shares and securities as stock-in-trade (SIT) Income arising from transfer of such shares and securities will be treated as business income, irrespective of the period of holding.

b) Where taxpayer desires to treat listed shares and securities (held for > 12 months immediately preceding the date of transfer) as capital asset Income arising from transfer thereof would be treated as capital gains. Furthermore, taxpayers treating the investment in listed shares and securities as capital asset, will not be allowed to adopt a different/contrary stand in subsequent years.

c) In all other cases Nature of transaction will continue to be decided keeping in view the earlier administrative guidance by the CBDT.

The guidance laid down in this Circular will not apply to sham transactions or bogus claims of long-term capital gain/short-term capital assets.

In order to remove ambiguity as to whether this Circular could be applied to unlisted shares, the CBDT issued another Instruction wherein the CBDT instructed the tax authority to tax the income from unlisted shares under the head Capital gain irrespective of the period of holding. However the instruction will not apply in the following situations:

The genuineness of the transaction is questionable

The transfer of unlisted shares is related to an issue pertaining to lifting of corporate veil

The transfer of unlisted shares is made along with the control and management of underlying business

(Source: Circular No. 06/2016 dated 29 February 2016 & CBDT Instruction No. 225/12/2016 dated 2 May 2016)

24 Tax Digest

Treaty Updates and TIEA Updates

The 2012 DTAA between India-Indonesia came into force

On 5 February 2016, the 2012 India-Indonesia DTAA came into force. The 2012 DTAA is effective in India from 1 April 2017 and replaces the earlier 1987 India-Indonesia DTAA. The 2012 DTAA provides for a maximum withholding rate of 10% for dividends, interests and royalties. It also includes a Limitation of Benefits (LOB) clause allowing for domestic anti-avoidance and anti-evasion rules to override DTAA benefits.

(Source: Notification No. 17/2016 F.No.503/4/2005-FTD-II, dated 16 March 2016)

Please click here to access our global alert

India and Mauritius sign protocol amending 1982 DTAA

India and Mauritius have recently signed a protocol (2016 Protocol) amending the 1982 India-Mauritius DTAA. The 2016 Protocol has included several provisions to enhance source country taxation rights, such as removal of capital gains exemption on transfer of shares, inclusion of a service PE provision, FTS and other income. At the same time, a limitation on source country taxation rights in respect of interest income has been provided at the rate of 7.5%. An LOB clause is also proposed to be included by the 2016 Protocol.

Under capital gains taxation, the 2016 Protocol provides for grandfathering of shares acquired on or before 31 March 2017 such that transfer of these shares will not be subject to source country taxation. Reduced taxation (at 50% of domestic law rates) is provided for shares acquired on or after 1 April 2017 but sold before 31 March 2019. However, such benefit in the transitory period is subject to fulfillment of the LOB provisions. Shares sold after 31 March 2019 will be subject to full taxation in source country.

Provisions relating to EOI have been revamped in order to bring them in line with existing international standards. Additionally, an Article on Assistance in collection of taxes has been introduced.

(For details, refer EY Alert dated 12 May 2016)

Protocol to DTAA between Belgium and India

initialed

According to a joint statement published by the Indian Ministry of External Affairs on 30 March 2016, Belgium and India recently initialed an amending protocol to the 1993 Belgium-India DTAA.

(Source : IBFD)

India signed limited DTAA with Maldives in respect of taxation of income from aircraft-operation

In 11 April 2016, Government of India (GoI) signed a limited DTAA with Maldives providing relief from double taxation for airline enterprises of India and Maldives by way of exemption of income derived by airline enterprise of India from the operation of aircraft in international traffic, from Maldivian tax and vice-versa, thereby, providing taxation rights to the resident country. The agreement also provides for Mutual Agreement Procedure for resolving any difficulties/doubts arising due to the interpretation or application of the agreement.

(Source: CBDT Press Release dated 11-04-2016-India-Maldives TIEA)

Tax Information Exchange Agreements (TIEA) updates

TIEA between India and Marshall Islands signed

On 17 March 2016, the GoI and the Marshall Islands signed a TIEA relating to tax matters. The official text of the TIEA is yet not available.

(Source : IBFD)

TIEA between India and Maldives signed

On 11 April 2016, India and Maldives signed a TIEA to enhance mutual co-operation between the two countries by having effective EOI in tax matters. The TIEA is based on international standards of transparency and EOI, which covers taxes of every kind and description imposed by the GoI and Maldives. The TIEA enables exchange of information, including banking information, between the two countries for tax purposes, which will help curb tax evasion and tax avoidance.

(Source: CBDT Press Release dated 11-04-2016-India-Maldives TIEA)

Treaty Updates

http://www.ey.com/GL/en/Services/Tax/International-Tax/Alert--India-Indonesia-revised-income-tax-treaty-enters-into-force

25 Tax Digest

Happenings across the border

German Finance Ministry issues 10 Point Action Plan against Tax Fraud, Tax Avoidance Schemes and Money Laundering

Following publication of the Panama papers, Germanys Finance Minister published on 11 April 2016 an Action Plan against Tax Fraud, Tax Avoidance Schemes and Money Laundering 10 next steps for a fair international tax system and a more effective combat against money laundering. According to German press information, key points of the Action Plan should be converted into legislative proposals prior to the German Parliaments 2016 summer recess. Some key proposals of the plan includes harmonizing various national and international black lists, monitoring automatic EOI, creating a global register for beneficial company ownership, eliminating statute of limitations benefits for tax evasion offenses and strengthening of German anti-money laundering measures etc.


UK introduces large business special measures regime

The UKs Finance Bill 2016 introduces a special measures regime, said to be aimed at tackling the small number of large businesses that engage in aggressive tax planning, or refuse to engage with HM Revenue & Customs (HMRC) in an open and collaborative manner. The legislation refers in its headings to large groups but potentially brings all UK groups, UK sub-groups, UK companies (which for this purpose appears to include UK PEs of non-UK resident entities) and UK partnerships within the scope of the measures.

However, HMRCs ability to issue warning notices and then actually apply sanctions is limited to those groups, companies and partnerships which an HMRC officer considers meet minimum turnover and/or balance sheet thresholds.


Australian Parliament passes Bill for non-final 10% withholding tax on foreign resident capital gains

On 22 February 2016, the Australian Senate passed the Tax Bill to implement the non-final 10% withholding tax obligation on the purchase of certain Australian real property from foreign residents. Broadly, and subject to various exclusions, the 10% non-final withholding measure applies to the acquisition of a capital gains tax asset from a foreign resident, where the asset is taxable Australian property, being either: (i) Taxable Australian real property, (ii) An indirect Australian real property interest, or, (iii) An option or right to acquire such property or such an interest. This is subject to the market value of the asset being AU$2 million or more.


OECD: JITSIC network meets regarding Panama Papers

A special project meeting of the Joint International Tax Shelter Information and Collaboration (JITSIC) Network was held by the Organisation for Economic Co-operation and Development (OECD) in Paris on 13 April 2016. Tax administration officials across jurisdictions participated in this special project meeting to deliberate on Panama papers revelations. Participants exchanged views on the Panama Papers and explored mechanisms for co-operation as necessary. OECD press release acknowledges that the follow-up will be ensured by each tax administration, in accordance with its own domestic laws and regulations as well as information-sharing agreements that governments have in place between them.

Click here to read the OECD press release.

http://www.ey.com/GL/en/Services/Tax/International-Tax/Alert--German-Finance-Ministry-issues-10-Point-Action-Plan-against-Tax-Fraud--Tax-Avoidance-Schemes-and-Money-Laundering http://www.ey.com/GL/en/Services/Tax/International-Tax/Alert--UK-introduces-large-business-special-measures-regimehttp://www.ey.com/GL/en/Services/Tax/International-Tax/Alert--Australian-Parliament-passes-Bill-for-non-final-10--withholding-tax-on-foreign-resident-capital-gainshttp://www.oecd.org/tax/tax-administrations-meet-on-panama-papers.htm

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BEPS updates

OECD releases Country-by-Country reporting XML Schema and related User Guide

On 22 March 2016, OECD released the standardized electronic format for the exchange of base erosion and profit shifting (BEPS) Country-by-Country (CbC) reports. The released material encompasses the CbC XML Schema and a User Guide. The XML Schema is a commonly used data structure for electronically holding and transmitting information. The User Guide explains the information required to be included in the CbC XML Schema. With this material, the OECD aims to facilitate a swift and uniform implementation of CbC reports. While the CBC XML Schema has been primarily designed for use by tax authorities, the CbC XML Schema can also be relied upon by taxpayers for transmitting the CbC report to their tax authorities, provided the used of the Schema is mandated domestically.


OECD releases plan to establish inclusive framework for BEPS implementation

On 23 February 2016, OECD agreed to a new framework that will allow all interested countries and jurisdictions to join in efforts to update international tax rules for the 21st century. The proposal for broadening participation in the OECD/G20 BEPS Project will be presented to G20 Finance Ministers at their next meeting on 2627 February 2017 in Shanghai, China.

The frameworks mandate will focus on the review of implementation of the four BEPS minimum standards, in the areas of harmful tax practices, tax treaty abuse, CbC reporting requirements for transfer pricing, and improvements in cross-border tax dispute resolution. It will also ensure ongoing data gathering on the tax challenges in the digital economy and to measure the impact of BEPS. This agreed framework constitutes an important step toward the implementation of the BEPS package around the world in the coming years, as well as for the review and monitoring of such implementation.


http://www.ey.com/GL/en/Services/Tax International-Tax/Alert--OECD-releases-Country-by-Country-reporting-XML-Schema-and-related-User-Guide http://www.ey.com/GL/en/Services/Tax/International-Tax/Alert--OECD-releases-plan-to-establish-inclusive-framework-for-BEPS-implementation

27 Tax Digest

Case Laws

Indirect TaxCustoms

High Court, Allahabad

Custodian of goods cannot demand warehouse charges where goods are detained by Customs Department

Customs Act, 1962 and Handling of Cargo in Customs Area Regulations 2009; in favor of assessee

Assessee imported heavy cut oil, which was detained on the ground that the petitioner has mis-declared the description of the goods in the bill of lading. Revenue contended that the goods imported were waste oil. After considering all aspects of the matter and the report of the Ministry of Environment and Forest, the Additional Commissioner issued an order holding that the goods imported were not waste oil and accordingly directed the consignment to be released. The relevant show cause notice was also dropped. The Assistant Commissioner issued an order to the Manager, Central Warehousing Corporation (CWC), who was in-charge of the goods, to waive the warehousing charges in view of Handling Cargo in Customs Area Regulations, 2009 (Regulations). However, the said goods were not released and therefore, assessee filed the present writ petition seeking a writ of mandamus commanding release of the consignment.

CWC contended that they were appointed as custodian of goods under Section 45 of Customs Act, 1962. CWC is responsible for the goods until they are cleared, and under Sections 66 and 68 of the Customs Act, 1962, the owner of the goods is liable to pay warehousing charges pursuant to clearance of goods and the same cannot be waived. CWC also argued that according to Section 148 and Section 170 of the Indian Contract Act, 1872, CWC had lien on the goods till remuneration was not paid.

High Court perused Section 45 of the Customs Act, 1962 as well as various Supreme Court judgments to observe that demurrage charges can be levied by the custodian of goods under the said Section 45. However, CWC is appointed as a custodian subject to certain terms and conditions of license. Clause 12 (VII) of the terms require the custodian to not charge any rent/demurrage on goods detained by the Customs Department. Furthermore, the Customs Cargo Service Provider (CCSP) will abide and discharge all responsibilities under Clause 6(l) of

Regulations, 2009, which also states that CCSP will not charge any rent or demurrage on the goods seized/detained/confiscated by Customs Department. On a collective reading of Section 45, terms and conditions of license and Regulations, 2009, the High Court held that CWC has no authority to demand warehouse charges on seized or detained goods. Therefore, it issued a writ of mandamus to release the goods without demanding warehouse charges on the goods detained by the Department.

Paswara Chemicals Ltd v. Union of India & Others; [TS-85-HC-2016(ALL)-CUST]

High Court, Delhi

Non-filing of appeal against the assessed Bill of Entry will not deprive the importer of his right to file refund under Section 27 of Customs Act, 1962

Customs Act, 1962; matter remanded

Assessee imported mobile phones on which it paid both customs duty as well as additional customs duty (CVD). Thereafter, assessee filed a refund claim on the ground that it was liable to pay only 1% CVD in place of 6% CVD it had paid. Reference was made to Notification 12/2015-CE dated 1 March 2015, which provides that CVD at the rate of 1% is applicable to mobile phones provided that no CENVAT credit on input or capital goods is availed. The decision of the Supreme Court in the case of SRF Industries v. Commissioner of Customs, Chennai; [2015 (318) ELT 607 (SC)] was also referred to by the assessee. In the said case, the Supreme Court held that for quantification of CVD in case of an article that had been imported, it has to be presumed that the said imported article has been manufactured in India and the extent of CVD exemption has to be ascertained.

The refund claim was rejected by the Assistant Commissioner on the ground that assessee has filed the refund of duty on bills of entry, which are already assessed. According to the Commissioner, once the assessment order is passed, duty has to be assessed in terms thereof, unless such assessment order was reviewed under Section 28 of Customs Act, 1962 or modified in an appeal. Therefore, the issue before the High Court was about the maintainability of refund claim.

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The Delhi High Court evaluated Section 27 of Customs Act, 1962, which was amended on 8 April 2011. An important change in the section is that a person can now claim refund of duty or interest as long as such duty or interest is borne by such person. Once an application is made under Section 27(1) of the said Act, it is incumbent on the authority concerned to make an order under Section 27(2) determining if duty or interest is refundable to the applicant. Section 27 of the Customs Act, 1962 as it now stands is not open to an authority to refuse to consider the application for refund only because no appeal has been filed against the assessment order, if any. The High Court also referred to the decision in the case of Aman Medical Products Limited v. Commissioner of Customs, Delhi; [2010 (250) ELT 30] wherein it was held that an assessee is entitled to maintain the refund claim notwithstanding that no appeal is filed against the assessed Bill of Entry. Therefore, the Court restored the refund applications and directed the Assistant Commissioner (Refund) to assess the case on merits.

Micromax Informatics Limited v. Union of India; [2016-3-TMI-431]

Tribunal, Kolkata

Assessee entitled to refund of SAD under Notification 102/2007-Cus when goods sold from SEZ to DTA

Customs Act, 1962; in favor of assessee

The issue involved in the present case is whether the assessee is eligible to refund of Special Additional Duty (SAD) under Notification No. 102/2007-CUS dated 14 September 2007, in respect of goods imported in the Special Economic Zone (SEZ) unit and subsequently supplied/sold to Domestic Tariff Area (DTA) unit. The said notification exempts goods imported into India for subsequent sale, from the whole of additional duty of customs under Section 3(5) of Customs Act, 1962 subject to the specified conditions.

The Tribunal referred to the decision in the case of Adinath Trade Link v. Commissioner of Customs, Kandla; [2013 (293) ELT 746], wherein the assessee had supplied goods to DTA from SEZ unit. Refund claim of the assessee was sanctioned holding that the benefit of Notification No. 102/2007-Cus cannot be denied. The entire provisions relating to refund under the said notification indicates that

the Government had an intention to refund the amount of SAD paid by any importer even if the goods are procured from SEZ, provided conditions of the notification are fulfilled. Moreover, in the present case the goods were originally imported by the assessee for use in SEZ. Such imports into SEZ unit are considered to be warehousing of goods after importation. After perusing the definition of importer, the Delhi Tribunal observed that assessee remained an importer till the goods are cleared for home consumption, i.e., sale to DTA.

According to the Tribunal, the assessee was an importer of goods and paid VAT at the time of sales to DTA units. The SAD paid has not been recovered from the DTA buyers. The conditions of Notification No. 102/2007-Cus are therefore, fulfilled. The Tribunal opined that the ratio laid down in Adinath Trade Link (supra) squarely applies to the present case. Accordingly, the appeal filed by the assessee was allowed.

Precision Polyplast Pvt. Ltd. v. Commissioner of Customs; [2016-4-TMI-276]

Tribunal, Mumbai

Bar of unjust enrichment not applicable in cases of refund arising out of finalization of provisional assessment

Customs Tariff Act, 1975; in favor of assessee

Imports of the assessee were subjected to provisional assessment. On the basis of provisional assessment, assessee deposited duty at the rate of 5%. The issue of valuation was settled by the Commissioner (Appeals) where it was decided that no loading was warranted. Consequently, the assessee filed a refund claim in respect of 5% revenue deposited during provisional assessment. The refund was sanctioned but credited to Consumer Welfare Fund by applying the doctrine of unjust enrichment. Therefore, the issue before the Tribunal was about the applicability of the doctrine of unjust enrichment with respect to the said refund.

The assessee contented that since refund arose out of finalization of provisional assessment, refund falls under Section 18 of the Customs Act, 1962. The said Section 18 deals with provisions of provisional assessment of duty. Furthermore, the provision of unjust enrichment did

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not exist during the period involved in the case. Bar of unjust enrichment was introduced w.e.f 13 July 2006 by amending Section 18 of Customs Act, 1962. Referring to various other CESTAT decisions, the assessee contented that doctrine of unjust enrichment will not apply to provisional assessment.

After evaluating Section 18 of Customs Act, 1962, before and after amendment, the Tribunal observed that at the time of provisional assessment, the bar of unjust enrichment arising on finalization of assessment was not applicable. The Tribunal also referred to the observation, made by the Supreme Court in the case of Mafatlal Industries v. Union of India; [1997 (89) ELT 247], that the doctrine of unjust enrichment is not applicable in case of provisional assessment. Moreover, a similar decision was taken by the Supreme Court in the assessees own case in civil appeal no. 3000/2007. Therefore, based on the above, the Tribunal allowed the appeal in favor of the assessee by holding that refund should be granted to assessee and not be credited Consumer Welfare Fund.

Spicer India Limited v. Commissioner of Customs, Chennai; [2016-5-TMI-177-CESTAT]

Central Excise

Supreme Court

Input credit reversible basis suppliers invoice when goods are supplied to group company

Central Excise Act, 1944; in favor of assessee

Assessee was engaged in the manufacture of HR coils, sheets, plates, etc., which were cleared on payment of excise. Adjacent to its plant, another group company (sister company) has a factory in which pig iron and molten metals were manufactured. The principal raw material for both these companies was iron ore pellets. The said pellets purchased from suppliers were carried to the assessees factory and the assessee availed credit of the duty paid on the entire quantity so procured. As and when required by the sister company, pellets were transferred through a conveyor, under cover of an invoice and on reversing an amount equal to the CENVAT credit availed that were so transferred. The assessee also raised debit notes on sister company for recovering actual expenditure by it in procuring iron ore pellets, such as bank commission,

interest, etc. SCNs were issued to both the companies alleging that the iron ore pellets were sold by the assessee to the sister company and amounts recovered in the form of debits notes were includible in the assessable value of such inputs that were cleared. Therefore, the issue in the instant case was whether transfer of iron ore pellets to sister company was sale of goods or transfer of raw material.

SC distinguished between the inputs on which credit has been taken, which were removed on sale and those which were removed on transfer. If removed on sale, transaction value according to Section 4(1)(a) of the Central Excise Act,1944 will be adopted. However, where goods are entirely transferred to a sister unit, the value adopted will be according to the invoice on the basis of which CENVAT credit was taken by the assesse, i.e., the invoice of the supplier of the pellets to the assessee. The SC also referred to the circular dated 1 July 2002, which clarified that, where no sale is involved but only a transfer by one sister unit to another, the value shown in the invoice on the basis of which CENVAT credit was taken by the assessee should be the value for the purpose of Rule 57AB of the Central Excise Rules, 1944 and Rule 3(4) of CENVAT Credit Rules, 2001. Furthermore, post manufacturing expenses cannot possibly amount to a duty of excise leviable on such goods. Therefore, based on the facts, transfer of iron ore pellets to sister company was not sale of goods but only transfer of raw materials procured under the Tripartite Agreement between the two companies and the supplier of the said pellets.

CCE, Raigad v. Ispat Metallics Industries Ltd. and Ors.; [2016-TIOL-59-SC-CX]

Supreme Court

Value of returnable packing material cannot be excluded from the assessable value unless there is a formal arrangement between seller and buyer

Central Excise Act, 1944; in favor of revenue

Assessee was engaged in manufacturing of soda ash. Sales were made in gunny bags to the buyers by the assessee. The assessee claimed that according to the arrangement between the assessee and buyers, gunny bags can be returned by the buyers and upon such return, the value thereof will be refunded to the buyer. The issue before the

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SC was whether the value of gunny bags was to be included in the assessable value of the manufactured goods.

SC referred ruling in case of Mahalakshmi Glass Works (P) Ltd. v. Collector of Central Excise, Bombay; [2002-TIOL-511-SC-CX] and Triveni Glass Ltd. v. Union of India & Ors; [2005-TIOL-32-SC-CX-LB] wherein it was held that if an arrangement exists between the seller and the buyer of excisable goods for return of packing materials by the buyer, carrying an obligation on the seller to return the value of packing materials to the buyer on such return, such value is not liable to be included in the assessable value of the finished product. Furthermore, if such an arrangement exists, the question of actual return is not relevant.

However, in the instant case, since the assessee failed to present that such an arrangement of return of the packing materials with the obligation on the part of the seller to refund the value existed between the parties, the Bench was unable to hold that the law laid down in the above mentioned cases will apply in the present case. Therefore, the appeals by the assessee stands dismissed and the value of gunny bags was includable in the assessable value of goods.

Tata Chemicals Ltd. v. Collector of Central Excise; [2016-TIOL-39-SC-CX-LB]

Supreme Court

Cost of bullet proofing carried out on jeeps after clearance from factory will not be added to the transaction value

Central Excise Act, 1944; in favor of assessee

The assessee was engaged in manufacturing of jeeps. In normal course, the jeeps were manufactured by the assessee without any bullet proofing system. However, there was a specific requirement from police departments in various states for supply of jeeps with bullet proofing system. However, these jeeps where cleared from factory of the assessee without bullet proofing. After clearance from the factory, the jeeps were sent to job workers outside the factory premises to make them bullet proof. The issue here was whether the cost of bullet proofing will be added to the transaction value for the purpose of excise duty.

SC agreed with the decision of tribunal, wherein Tribunal held that the cost of bullet proofing will not be added to arrive at the transaction value. Furthermore, it relied on the Board Circular No. 139/08/2000-CX dated 4 January

2001, which clarified that the duty cannot be charged on the value addition carried out outside the factory of clearance on account of certain processes not amounting to manufacture of manufactured goods by an independent job worker.

Therefore, the cost of bullet proofing will not be added to the transaction value for the purpose of excise duty.

Commissioner of Central Excise & Customs v. M/s. Mahindra & Ma

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