Tax Digest - Quarterly newsletterDecember 2015

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Dear readers,We are pleased to present the December 2015 edition of EY’s quarterly newsletter, Tax Digest, which summarizes significant tax and regulatory developments during the October to December 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

• Tax Residency Certificate (TRC) is sufficient evidence to grant India-Mauritius DTAA benefit

• Income-based deduction claimed for two phases separately where separate commencement certificates were available

• Significant Supreme Court decisions

• Natural pond specially designed for rearing/breeding of prawns qualifies as “plant” for the purpose of depreciation

• Depreciation on trademarks, copyright and technical know-how considering them as “plant”

• Clubbing provisions inapplicable to income arising to trust created for benefit of minors, which is deferred beyond period of minority

• Rulings on tax withholding

• No withholding required on the basis of mere book entry where income did not materialize

• Amendment to ITL provision providing for carve out from disallowance of expense when compliance is taken care of by the payee is retrospective in nature

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• Taxpayer eligible to claim credit of taxes withheld in its name on the income of a sister concern

• Withholding tax obligation only in case of monetary payments, decides Karnataka HC

• Issues on capital gains

• Punjab & Haryana HC allows “period substitution” for capital gains on sale of shares converted from debentures

• Ruling on taxability of income

• Salary taxation net of refund of excess salary of past years

• Taxability of compensation received from prospective employer for non-employment

• Whether an abusive transaction?

• Excess of interest expense over interest income not deductible, where it is incurred to divert losses to shareholders

• Allowabililty of interest paid on borrowed funds diverted to its subsidiary and directors at concessional rates

• Application of treaty anti-abuse provision

• Invoking treaty anti-abuse provision of the India-UAE DTAA

• India-Singapore DTAA benefit available to freight income received in the UK; on facts, limitation of relief article not applicable

• Other significant rulings

• No disallowance of interest expenditure absent exempt dividend income received during tax year

• Interest income on Deep Discount Bonds accrues on maturity of bonds

• Capital receipt credited to Profit & Loss account (P&L) is liable to Minimum Alternate Tax (MAT)

• HC upholds prosecution for deliberate non-payment of tax

• Karnataka HC rules on availability of foreign tax credit (FTC) relief where income is exempt from Indian taxes under income linked incentive scheme

• Mumbai ITAT rules on deductibility of ESOP expenditure

• Is there a Permanent Establishment (PE)?

• Service PE clause explained, mere existence of distribution agreement does not result in a PE being constituted

• Procurement activity carried out by a liaison office (LO) in India does not create a PE

• Some key issues on which Special Leave Petitions (SLPs) were dismissed by the SC

• Recent decisions on taxation of Royalty/Fees for Technical Services (FTS) payments

• From the Tax Gatherer’s desk

• CBDT clarifies on non-applicability of MAT to foreign companies

• CBDT simplifies procedure for furnishing NIL withholding declarations

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• CBDT issues a Press Release clarifying concessional tax rate of 5% on rupee denominated bonds for non-residents (NRs)

• India signs Competent Authority Arrangement (CAA) with US in accordance with the US- India Inter-Governmental Agreement to implement the Foreign Account Tax Compliance Act (FATCA)

• Treaty updates

• Protocol to treaty between India and Israel signed

• The Indian cabinet approves protocol to amend treaty with Vietnam and Kuwait

• Happenings across the border

• Kuwait Tax Authorities adopt “Virtual Service PE” concept

• UK Tax Authorities release consultation on modified UK patent box

• UK Tax Authorities address tax treatment of Delaware Limited Liability Companies (LLCs)

• Swedish Government presents final proposal on limitations to current participation exemption rules and amendments to Swedish Coupon Tax Act

• South Korea introduces one-time temporary voluntary disclosure program for offshore income and assets

• Australian treasurer introduces multinational anti-avoidance law and country-by-country reporting

• Italy issues new anti-abuse rule and other measures to enhance legal certainty in tax matters

• OECD BEPS updates

• OECD released its final reports on BEPS Action Plan and India’s possible approach

Indirect taxCase lawsCustoms

• Supreme Court

• Antenna is inseparable part of base transreceiver station and liable to concessional rate of duty

• Exemption from Special Additional Duty (SAD) not available in case of goods exempted from Sales tax

• High Court

• Foreign brands are not entitled to avail benefits under the “Served from India Scheme” (SFIS)

• Amendment in Bill of Entry allowed even if wrong expression/language used

• Courts cannot enter the domain of policy making

• Tribunal

• Penalty cannot be imposed on assessee when duty was not properly assessed by assessing officer

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Central Excise

• Supreme Court

• Exemption notifications are to be construed strictly; non-fulfillment of conditions of notification would result in denying benefit of exemption to assesse

• Both inputs and final products are entitled to rebate under Rule 18 of CER

• Printing amounts to manufacture and hence, subject to Excise duty

• Assessee liable to pay interest in terms of Section 11AB, despite paying differential duty before the issuance of show cause notice

• High Court

• Amendment to Section 35F is reasonable, does not adversely affect the right of appeal. Held that the amendment has a retrospective operation as it has no bearing on the date when a particular lis had commenced

• Tribunal

• Third member permits excess payment of duty to be adjusted against short payment of duty in case of provisional assessment

• Credit is allowed for such inputs which are required for manufacture, irrespective of fact that certain by-products have emerged; held that no reversal is required under Rule 6(3)

CENVAT credit

• High Court

• Duty paid by job-worker which was not liable to be paid, is eligible for credit in hands of principal manufacturer

• Tribunal

• Unutilized CENVAT credit on closure of business is allowed as refund

• CENVAT credit of duty paid on exempted goods allowed, but not allowed of the amount paid under Rule 6(3) of CCR

• Assessee will be eligible for refund under Rule 5 of CCR, 2004 even if separate notification was issued

• Input service also includes service to set up premises of service provider

Service Tax

• High Court

• Buying and selling lottery tickets does not fall within the meaning of service and hence, levy of Service tax is clearly unsustainable

• Service tax applicable on flats constructed and allotted to landowner against land transfer

• Tribunal

• Intellectual Property Right (IPR) not covered by Indian laws will not be covered under the category of IPR Services

• Service tax not to be charged on services rendered by assessee beyond the territorial waters of India

• Excess baggage charges are an integral part of main service, i.e. transportation of passengers by air and not taxable under the category of “Transportation of Goods by Air”

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VAT/CST

• Supreme Court

• Input tax credit allowed in cases where a particular transaction is not taxable, since there is a difference between exemption to goods and for specified sale transactions or dealers

• High Court

• VAT leviable on supply of petroleum products to various incoming and outgoing vessels within or beyond the port limits, if substantial part of the transaction takes place within the State

• Credit of input tax paid on Duty Entitlement Pass Book (DEPB) scrips cannot be denied if it has effected the cost of the product sold, either directly or indirectly

• Supply of “demineralized water” in medicinal injections taxable as composite works contract

• Supply of smart cards to the Transport Department is a contract for labour and service, and cannot be held as sale

• Provision of passive infrastructure and related services to telecommunication operators not subject to VAT, since it was merely a permissive use of the infrastructure for a limited purpose

Key statutory updates

• Customs

• Foreign Trade Policy 2015-20

• Notification/Circulars

• Public notices

• Central Excise

• CENVAT credit

• GST

• Service Tax

• VAT

Regulatory Foreign Exchange Management Act (FEMA) 1999

• Foreign investment allowed in Real Estate Investment Trust (REIT), Infrastructure Investment Trust (InVit), Alternative Investment Funds (AIF)

• Amendment in the definition of the term “real estate business” to exclude REITs

Foreign Direct Investment Policy Department of Industrial Policy and Promotion (DIPP)

• Liberalization in FDI policy in various sectors by DIPP

• 100% automatic route in White Label ATMs (WLA) operations

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What’s new Useful links

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Base Erosion and Profit Shifting (BEPS)

Swachh Bharat Cess: Webcast

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

Tax insights Linkedin group

Indian Tax Insights Blog

Tax Insights magazine

Goods and Service Tax

India Tax Webcast

Tax Library

www.ey.com

• Increase in initial validity of industrial license for defense sector

• Issuance of partly paid up shares and warrants

Reserve Bank of India

• Major liberalization in ECB policy

• RBI revised the list of compliances to be submitted by Non-Banking Financial Institutions (NBFCs)

• No fresh permission/ renewal granted to foreign law firms by the RBI for opening of LO

• RBI increased limit for investments by FPI in Government securities

• NRIs may subscribe to National Pension System through normal banking channels

• Submission of “Annual return on foreign liabilities and assets” by LLPs

• RBI issues framework for issuance of rupee-denominated bonds overseas

• Enactment of Foreign Exchange Management (Regularization of assets held abroad by a person resident in India) Regulations, 2015 by RBI

• Opening of foreign currency accounts in India by ship manning/crew management agencies

• Consolidated guidelines on settlement of import and export related payments facilitated by Online Payment Gateway Service Providers (OPGSP)

In the press

Compilation of alerts

• Direct Tax

• Indirect Tax

• Regulatory

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Verdicts!

Direct taxReported decisions supported by our Litigation team

Tax Residency Certificate (TRC) is sufficient evidence to grant India-Mauritius DTAA benefit

In the case of Serco BPO Pvt. Ltd. [TS-484-HC-2015(P&H)], the Punjab & Haryana High Court (HC), was dealing with tax withholding implications in the hands of the taxpayer with respect to consideration paid to Mauritius residents (sellers) for acquiring shares in an Indian company. Relying on Central Board of Direct Taxes (CBDT) Circular No. 789 Dated 13 December 2000, which expressly clarifies the sufficiency of TRC for accepting the status of residence for applying the double tax avoidance agreement (DTAA), the HC held that the TRC issued by Mauritian Tax Authorities is sufficient evidence for grant of benefits under the India-Mauritius DTAA. Hence, the taxpayer was not required to withhold taxes on the gains earned by sellers, since it was not taxable in India due to favorable DTAA provisions.

Income-based deduction claimed for two phases separately where separate commencement certificates were available

In the case of Kewal Real Estate Pvt. Ltd. [ITA No: 2028 & 2218 /Pune/ 2012], the taxpayer commenced development of a large housing project in two parts, i.e., phase 1 and phase 2. The commencement certificates for both the phases were obtained at different dates. The taxpayer claimed tax holiday available to housing projects in respect of both the phases. The tax authority, however, did not accept the taxpayer’s claim, but instead claimed that the whole project was a single project and the taxpayer ought to have completed the entire project within three years from the end of the year in which the first commencement certificate (for phase 1) was obtained. The Pune Tribunal relied on the rulings of Bombay HC in case of Vandana Properties [ITA No. 3633 of 2009 and 4361 of 2010] and Mumbai Tribunal in the case of Mudhit Mandalal Gupta [51 DTR 217] and concluded that the taxpayer can bifurcate the project into two parts on the basis of commencement certificate. Hence the date of completion of phase 2 should be reckoned from the date of commencement certificate issued by the concerned

authority with respect to that phase. Accordingly, the taxpayer had obtained completion certificates well within the time frame mentioned in the provisions of the Income Tax Laws (ITL) and is eligible to claim tax holiday for both the phases — phase -1 and phase-2.

Significant Supreme Court decisions

Natural pond specially designed for rearing/breeding of prawns qualifies as “plant” for the purpose of depreciation

In the case of Victory Aqua Farm Ltd. [TS-522-SC-2015], the taxpayer was engaged in the business of growing prawns in specially designed ponds. The Supreme Court (SC) allowed the taxpayer’s claim of depreciation with respect to such ponds, treating the pond as a “tool” used for the purpose of business. The SC relied on its earlier ruling in the case of Karnataka Power Corporation [9 SCC 57] and held that, since the ponds were specially designed for rearing/breeding of the prawns, they satisfy the functional test and had to be treated as tools of the business of the taxpayer. Hence, the ponds qualify as plant and depreciation is to be allowed to the taxpayer.

Depreciation on trademarks, copyright and technical know-how considering them as “plant”

In the case of Mangalore Ganesh Beedi Works v. CIT [TS-595-SC-2015], the taxpayer was an association of persons, consisting of three partners of erstwhile partnership firm Mangalore Ganesh Beedi Works (MGBW). The Taxpayer had acquired the trademarks, copyright and technical know-how (IPRs) of MGBW pursuant to its dissolution. The issue before the SC was whether the taxpayer is entitled to claim depreciation on the IPRs as “plant”. The SC noted that the partnership deed of MGBW provided the scope for vesting of the firm name and trademarks, along with the business on a going concern basis, to the highest bidding partner/s on dissolution of the firm. On this basis, the SC considered the tax authority’s action to reject the claim of the taxpayer for depreciation on acquisition of such IPRs (and treating it as an acquisition of goodwill) as amounting to rewriting of the bonafide agreement, which is not permitted in law. On the issue of depreciation, the SC noted that the provisions of the ITL for the relevant year did not make any distinction

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between tangible and intangible assets, such as the amended definition in a later year, and held that the IPRs come within the definition of “plant”, being commercially necessary and essential.

(For more details, please refer EY Alert dated 20 October 2015)

Clubbing provisions inapplicable to income arising to trust created for benefit of minors, which is deferred beyond period of minority

In the case of Kapoor Chand v. ACIT [TS–479–SC–2015], the issue before the SC was whether income from a partnership firm arising to a trust created for the benefit of minors was taxable in the hands of the parent by virtue of the clubbing provisions.

It was observed that in terms of the trust deed, such income could not be received by or spent for the benefit of a minor till heattains majority. In case any minor died before attaining majority, his or her share would vest into the surviving minor.

The SC held that the clubbing provisions were attracted only when income results to minors during their minority. In the present case, due to the operation of trust deed covenants, the minor did not receive any benefit during the year. Benefit, if at all, is likely to accrue when the minor attained majority. Therefore, the clubbing provisions were not attracted.

(For more details, please refer EY Alert dated 28 August 2015)

Rulings on tax withholding

No withholding required on the basis of mere book entry where income did not materialize

In the case of DIT v. Ericsson Communications Ltd. [TS-523-HC-2015(Del)], the taxpayer initially credited royalty amount to the account of its Swedish holding company; however, that was subsequently reversed as the payment of royalty was not permissible according to the industrial policy in force at the material time. The Delhi HC held that, in the facts of the case, credit entry in books did not result in enforceable debt in favor of holding company due to legal constraint in payment of royalty due to industrial policy as well as conduct of the parties relieving the

taxpayer from obligation to pay royalty and reversal of entry in the very same year. Tax withholding provisions are integral to charging section and in as much as credit entry did not result in any income for the holding company, tax withholding provisions are not triggered. The entries concerned hypothetical income, which never materialized.

Amendment to ITL provision providing for carve out from disallowance of expense when compliance is taken care of by the payee is retrospective in nature

The ITL provision provides for disallowance of specified expenses in computation of business income if there is default in tax withholding. Amendment was brought in by Finance Act 2012 w.e.f. 1 April 2013, which provides relief to the defaulting taxpayer based on compliance by the payee. The Delhi HC in the case of CIT v. Ansal Land Mark Township (P) Ltd. [ITA 160/2015 and 161/2015] held that amendment inserted is declaratory and curative in nature and is to be regarded to have retrospective effect. The HC referred to the case of Rajeev Kumar Agarwal v. ACIT [TS-313-ITAT-2014(AGR)], wherein the Agra Income Tax Appellate Tribunal (Tribunal) had observed that prior to the amendment, the disallowance provision created undue hardship even in cases where the taxpayer’s tax withholding lapse does not result in any loss to the Government. The amendment was inserted with a purpose to cure this shortcoming and obviate the unintended hardship. Hence, such amendment of curative nature to avoid unintended consequences is to be treated as retrospective in nature.

Taxpayer eligible to claim credit of taxes withheld in its name on the income of a sister concern

In the case of CIT v. Relcom [TS-618-HC-2015(DEL)], Delhi HC held in the favor of the taxpayer on the issue of availment of tax credit with respect to income of a sister concern, which was reflected in the tax credit statement of the taxpayer due to the mistake of the payer. After noticing that the sister concern never availed the tax credit, the HC allowed the credit of these taxes to the taxpayer even though no corresponding income was offered to tax. The

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HC also held that the credit cannot be denied merely on a technical ground that corresponding income was not that of the taxpayer. The HC relies on SC ruling in Sardar Amarjit Singh Kalra v. Pramod Gupta [(2003) 3 SCC 272] to hold that such action would unnecessarily prolong the process of seeking refund based on tax credit.

Withholding tax obligation only in case of monetary payments, decides Karnataka HC

In the case of CIT v. Bruhat Bangalore Mahanagar Palike (BBMP) [TS-596-HC-2015(KAR)], on voluntary surrender of land by landowner under Karnataka Town and Country Planning Act, 1961, BBMP issued Development Right certificates (DRCs) to the land owners by way of consideration representing 1.5 times of land area surrendered. DRC is additional floor area capable of being exploited for additional construction in addition to base land potential and can be used on any land of the owner himself/herself or can even be transferred to other land owner in the relevant location. The tax authority invoked withholding tax provisions on compensation paid upon compulsory acquisition of immovable property and held BBMP to be an “taxpayer in default” for not withholding the appropriate taxes on the value of DRC. The Karnataka HC held that it is only when certain payment (in monetary form) is made to a party, that person is obliged to comply with tax withholding provisions. In the present case, no monetary payment was made by BBMP to the land owner and, hence, BBMP cannot be held responsible for any withholding tax compliance.

The HC further held that the acquisition was under a scheme of “voluntary surrender” of land and hence, withholding tax provisions as applicable to compulsory acquisition cannot be applied.

Issues on capital gains

Punjab & Haryana HC (P&H HC) allows “period substitution” for capital gains on sale of shares converted from debentures

In the case of Naveen Bhatia [(2015) 62 taxmann.com 87 (P&H HC)],the HC was concerned with determining a period of holding of shares allotted pursuant to conversion of fully convertible debentures (FCDs) for the purpose of

computing capital gains. There is no specific provision under the ITL, which provides for determination of holding period of such converted shares. With regard to the provisions of the ITL, which provide for tax neutrality and cost substitution in respect of conversion of debentures into shares, the P&H HC held that even in absence of a specific provision, period of holding of shares allotted pursuant to the conversion of FCD, too, must be reckoned from the date of allotment of FCD and not from the date of conversion or allotment of the converted shares.

The HC distinguished Calcutta HC ruling in case of Mrs. A. Ghosh [141 ITR 45] and Bombay HC ruling in the case of Santosh L. Chowgule [234 ITR 787], wherein it was held that converted shares will be deemed to have been held by the taxpayer from the date of issue of converted shares and not from the date of issue of original instrument. The HC observed that in these cases, the terms of conversion were not stipulated as on the date of allotment of underlying financial asset as compared to the present case where a right is appended to the debenture holder upon allotment itself, to receive shares on conversion after the stipulated period.

Rulings on taxability of income

Salary taxation net of refund of excess salary of past years

Ahmedabad Tribunal, in case of Vrajeshwari B. Parikh v. ITO [TS-533-ITAT-2015(Ahd)], held that current year’s salary needs to be reduced by refund of excess salary paid in earlier years and the net salary alone is taxable. This is because salary is taxable on “due” basis and if it is found that excess salary has been erroneously paid in the past to which employee was never entitled, the employer can validly recover it from current year’s salary. In such circumstance, the net salary after reduction of past years’ excess salary alone becomes “due” to the employee. The mode of recovery of excess salary, whether through payment of cheque by employee or by deduction from current year’s salary, is not relevant.

(For more details, please refer EY Alert dated 28 September 2015)

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Taxability of compensation received from prospective employer for non-employment

In the case of CIT v. Pritam Das Narang [TS-532-HC-2015(Del)], the Delhi HC upheld non-taxability of compensation received from prospective employer for denial of employment. In the facts of the case, the prospective employer after issuing offer letter to the taxpayer to recruit him as Chief Executive Officer reneged on its offer and expressed inability to recruit the taxpayer from the scheduled date. The taxpayer demanded compensation for loss of other lucrative opportunities available to him. The HC held that payment received as compensation for breach of promise and not for rendering any services is not taxable as profits in lieu of salary in the absence of employer-employee relationship.

Whether an abusive transaction?

Excess of interest expense over interest income not deductible, where it is incurred to divert losses to shareholders

In the case of Deepak Nagji Vira v. ITO [TS-667-ITAT-2015(Mum)], the Mumbai tribunal disallowed the interest/brokerage expenses incurred in excess of interest income. The taxpayer borrowed funds at increased rate of interest and further advanced it to a company in which he was director and shareholder and was charging interest @ 12% p.a. The Tribunal agreed with the tax authority that the loss was self-inflicted and no prudent person could incur an increased expenditure to earn a known low income. Excess interest expenditure can nevertheless be allowed where actual earning of income is not certain. In the facts and circumstances of the present case, however, the impugned expenditure is incurred only to contain the losses of the borrower-company, by diverting it to shareholders to that extent.

Allowabililty of interest paid on borrowed funds diverted to its subsidiary and directors at concessional rates

In the case of Hero Cycles (P) Ltd. [Civil appeal no 514 of 2008], the SC allowed interest paid on borrowed funds, which were further diverted to its sister concerns interest-free and to its directors at concessional rates. The SC

noted that interest-free loans were given to the subsidiary because of an undertaking given by the taxpayer to financial institutions for granting loan to the subsidiary. The SC relied on its own ruling in case of S.A. Builders Ltd. [2007 (288) ITR 1 (SC)] and referred to Delhi HC’s decision in the case of Dalmia Cement (B.) Ltd. [2002 (254) ITR 377] and held that the interest-free advance to subsidiary was on grounds of commercial expediency and hence, interest on such advances cannot be disallowed under the ITL.

In respect of loan advanced to directors at concessional interest rates, the SC agreed with the taxpayer that these advances were not given out of borrowed funds, since the taxpayer had sufficient funds of its own.

Application of treaty anti-abuse provision

Invoking treaty anti-abuse provision of the India-UAE DTAA

The Rajkot Tribunal, in the case of MUR Shipping DMC Co. [TS-603-ITAT-2015(Rjt)], held on facts that the taxpayer is eligible for India-UAE DTAA benefit. With the amendment to the India-UAE DTAA by way of a protocol dated 26 March 2007, the requirement of actual liability to tax for the residents in the UAE was consciously removed from the definition of “resident of a contracting state”. For this purpose, reliance was placed on the Delhi HC ruling in Emirates Shipping Line FZE [(2012) 349 ITR 493(Del)]. Therefore, despite not paying any taxes in the UAE, the taxpayer is eligible to claim the benefits of the India-UAE DTAA.

The Limitation of Benefit (LOB) clause of the India-UAE DTAA can be pressed into service only when the main purpose, or one of the main purposes of the creation of an entity was to obtain benefits of the DTAA which would otherwise not be available. Article 8 (shipping income) of the DTAA only requires that the profits derived by an enterprise from operation of ships in international traffic will be taxed only in that state. It does not depend on the situs of ownership of the ships, or the fact that these ships are being owned by an entity in Marshall Islands. Therefore, this cannot be a reason to invoke the anti-abuse provision of the DTAA.

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India-Singapore DTAA benefit available to freight income received in the UK; on facts, limitation of relief article not applicable

In the case of Alabra Shipping Pte. Ltd. [TS-588-ITAT-2015(Rjt)], the Tribunal had to evaluate granting of the India-Singapore DTAA benefits with respect to freight income received by the taxpayer in its bank account in London. The Tribunal observed that the limitation of relief (LOR) Article under the DTAA is triggered when:

(i) The income is exempt from tax or is subject to low or no tax in the source state (i.e., India)

(ii) The said income is taxable on receipt basis in the resident state (i.e., Singapore).

In the present case, the income was fully taxed in Singapore on accrual basis. Therefore, the anti-abuse rule in the LOR Article of the DTAA did not trigger to deny DTAA benefits to the taxpayer.

(For more details, please refer EY Alert dated 15 October 2015)

Other significant rulings

No disallowance of interest expenditure absent exempt dividend income received during tax year

In case of Cheminvest Ltd. v. CIT [TS-504-HC-2015(Del)], the Delhi HC ruled on the issue whether expense disallowance for exempt income is needed if in a particular tax year, no exempt income is actually earned. Overruling Special Bench’s ruling in taxpayer’s case and following its own prior ruling in the case of CIT v. Holcim India (P) Ltd. [TS-640-HC-2014 (Del)], the Delhi HC held that there can be no disallowance of expense if no exempt income is actually earned during the relevant tax year. The HC also distinguished SC’s ruling in the case of CIT v. Rajendra Prasad Moody[115 ITR 519 (SC)], which held that if any

expenditure is incurred for earning any taxable income, the same is deductible even if no positive income is earned in a particular tax year. The HC held that this decision cannot be used in reverse to infer that even if no exempt income is earned, expenditure disallowance will be triggered.

(For more details, please refer EY Alert dated 08 September 2015)

Interest income on Deep Discount Bonds accrues on maturity of bonds

The Mumbai Tribunal, in the case of ICICI Securities Primary Dealership Ltd. [TS-536-ITAT-2015(Mum)], addressed the issue of treatment of interest income on Deep Discount Bonds (DDBs) in hands of the taxpayer who held the same as stock-in trade. By placing reliance on CBDT Circular [No. 225/45/96 dated 12 March 1996], the Tribunal held that no interest income can be imputed on “time” basis on DDBs before their maturity. If DDBs are sold before maturity, the difference between cost and selling price is assessable as business income. Accordingly, the Tribunal deleted the addition made by the tax authority toward accrual of interest income on “time” basis on DDBs held by the taxpayer.

Capital receipt credited to Profit &Loss account (P&L) is liable to Minimum Alternate Tax (MAT)

In the case of B&B Infotech Ltd. [TS-643-ITAT-2015(Bang)], the taxpayer credited the P&L , with the amount of remission of loan liability and also explained its nature in notes to accounts. The Tribunal held that, since the P&L has been prepared in accordance with Schedule VI of Companies Act and credit of remission of loan liability is in conformity with mandatory accounting standards, the amount credited to P&L cannot be excluded while computing “book profit” under the MAT provisions of the ITL.

HC upholds prosecution for deliberate non-payment of tax

In the case of Kalluri Krishan Pushkar [TS-646-HC-2015(T&AP)], the taxpayer was a government contractor who did not pay tax liability admitted in his return of income. The taxpayer contended that tax was not paid as

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he did not receive contract bills from the state Government and undertook to pay the demand as and when he receives contract bills. The tax authority noted that despite realization of substantial amount of contract bills during financial year for which tax return was filed, the taxpayer did not pay the tax. The tax authority levied penalty for default in payment of tax and also initiated prosecution proceedings against the taxpayer by lodging complaint before Magistrate. The HC held that non-payment of taxes despite receiving a substantial sum of contract receipts amounts to a wilful attempt to evade payment of taxes and accordingly, upheld initiation of prosecution.

Karnataka HC rules on availability of foreign tax credit (FTC) relief where income is exempt from Indian taxes under income linked incentive scheme

In the case of Wipro Ltd. [TS-565-HC-2015(KAR)], one of the questions before the Karnataka HC was whether the tax paid in a foreign country in respect of income, which is exempted under the income-linked incentive scheme (ILIS) of the ITL is eligible for FTC in India. The HC analyzed the charging provisions, as well as the double tax relief provision, of the ITL and ruled that the income, which is exempt by virtue of the ILIS of the ITL, though exempt from Indian taxes, qualifies as “income chargeable to tax”. Accordingly, any foreign taxes paid in respect of such income are to be available for FTC, if allowed under the relevant DTAA. The HC also held that the state taxes paid in the foreign countries are to be allowed as FTC under the unilateral tax credit provision of the ITL.

(For more details, please refer EY Alert dated 07 October 2015)

Mumbai ITAT rules on deductibility of ESOP expenditure

In case of HDFC Bank Ltd. [TS-553-ITAT-2015(Mum)], the taxpayer issued shares to public at large as well as to its employees at a discounted price. The Mumbai Tribunal relied on the Special Bench ruling in case of Biocon Ltd. [TS-322-ITAT-2013(Bang)] wherein it was stated that the ESOP discount expense is tax deductible expenditure as it is an amount foregone by the company with a view to retain the employees.

On calculation of the quantum of discount, the Tribunal ruled that when the shares are issued to the public at large as well as the employees, the amount foregone by the company needs to be reckoned based on the issue price of the shares, issued to the public during the relevant year as compared to the market price of shares. The Tribunal further stated that ascertaining the discount amount is a factual aspect and will depend on the facts and circumstances of each case.

Is there a Permanent Establishment (PE)?

Service PE clause explained, mere existence of distribution agreement does not result in a PE being constituted

In the case of Reuters Ltd. [TS-511-ITAT-2015(Mum)], a UK Company, was engaged in the business of providing news and financial information through its global network. It had an Indian subsidiary, RIPL, with which it entered a distribution agreement. The Mumbai Tribunal held on facts that the RIPL, does not constitute the taxpayer’s dependent agent PE or service PE in India.

According to the distribution agreement, the taxpayer’s products were made available to RIPL for distribution in India. Moreover, RIPL was provided access to taxpayer’s global network. The taxpayer merely provided products/services to RIPL for further redistribution. RIPL had to put its best efforts to promote and sell these products/services in India. The company had independent contracts with subscribers in India. Furthermore, it did not habitually maintain stock for regularly delivering goods on behalf of the taxpayer or habitually secured orders/concluded contracts on behalf of the taxpayer. Therefore, RIPL does not constitute dependent agent PE of the taxpayer in India as per India-UK DTAA.

With respect to applicability of service PE clause, the Tribunal noted that the taxpayer deputed one of its persons to India to act as a Chief Reporter in India for collection and dissemination of news. The personnel did not have anything to do with the distribution agreement. Therefore, since no services were provided by the personnel to RIPL, no service PE of the taxpayer was found to be constituted in India.

14 Tax Digest

Procurement activity carried out by an LO in India does not create a PE

The Karnataka HC in the case of Columbia Sportswear Company v. DIT [TS-600-HC-2015(KAR)] was concerned with the issue as to whether procurement activity undertaken by an LO created a taxable presence in India. The HC noted that the purchase exclusion provided in the ITL, as well as PE exclusion under the India–US DTAA, is available where an NR purchases goods in India for the purpose of exports. With regard to the facts of the case and its earlier decisions, the HC held that the various activities performed by the LO were for carrying on the activities of purchasing goods for exports.

(For more details, please refer EY Alert dated 26 October 2015)

15 Tax Digest

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

Citation Particulars Ruling of HC

CIT v. Subrata Roy Sahara

[TS-614-SC-2015]

The Tax authority preferred an SLP against Delhi HC’s order deleting addition on account of deemed dividend on amounts transferred by firm to partner, who is also a Managing Director(MD)-cum- shareholder in a closely held company.

• The taxpayer was the MD of Sahara India Savings and Investment Corporation Ltd (SISICOL) and partner of Sahara India (the firm).

• The firm was acting as an agent of SISICOL for which certain amount was due from SISICOL to the firm. On the other hand, the firm granted a loan to the taxpayer. The firm had sufficient funds in its reserves at that point of time.

• The tax authority held that the loan granted by the firm to taxpayer was a loan out of SISICOL’s accumulated profits to taxpayer shareholder and regarded the firm as a conduit to bypass application of deemed dividend provision. Therefore, treated the loan granted by the firm to the taxpayer as “deemed dividend”.

• The HC noted that the firm was a separate legal entity and had sufficient funds to advance loan to the taxpayer. Moreover, the tax authority failed to establish that the dues from SISICOL to the firm and the loan from firm to the taxpayer was one single transaction.

• The HC therefore, did not lift the corporate veil and treat the two transactions as one. Accordingly, the deemed dividend addition was deleted.

• The HC also remarked that deemed dividend being deeming fiction, the onus of proof lies on the tax authority.

CIT v. Calibre Personnel Services Pvt. Ltd.

[TS-514-SC-2015]

The Tax authority preferred an SLP against Bombay HC’s order deleting disallowance on unpaid service tax routed through Balance Sheet.

• Tax authority made an addition to the total income of the taxpayer due to unpaid service tax, which was reflected in the Balance Sheet of the taxpayer.

• The Bombay HC noted that the taxpayer had not claimed any expenditure in respect of such service tax payable.

• The HC relied on the Delhi HC ruling in case of Noble & Hewitt Pvt. Ltd. and held that there cannot be a disallowance toward unpaid service tax where amounts of service tax payable was not debited to the P&L.

CIT v. Rave Entertainment Pvt. Ltd.

[TS-531-SC-2015]

Tax authority preferred an SLP against Allahabad HC’s order deleting concealment penalty for wrong deduction claimed

• The HC noted that the claim was made based on the legal advice of professionally qualified persons. Moreover, the tax authority failed to record satisfaction before initiating the penalty proceedings.

• Hence, the HC, deleted the penalty.

16 Tax Digest

Recent decisions on taxation of Royalty/Fees for Technical Services (FTS) paymentsSummarized below are some decisions on Royalty and FTS, also considering relevant DTAA provisions:

Case law Payment description Ruling

Food world Supermarkets Ltd. v. DDIT

[TS-629-ITAT-2015(Bang)]

Bangalore Tribunal

Reimbursement of salary paid to seconded employee

• Taxpayer entered a secondment agreement with a Hong Kong-based company (HK Co), pursuant to which HK Co seconded five employees to the taxpayer. Taxpayer made payments to HKCO towards reimbursement of salary cost paid by HK Co to such seconded employees.

• The Tribunal observed that the seconded employees were high-level officials who were deputed because of their expertise and managerial skills in their respective fields. There was no employment agreement between the taxpayer and the seconded employees.

• The employees were performing their duties for and on behalf of HK Co. Therefore, payment made by the taxpayer to HK Co amounts to FTS under the provisions of the ITL.

IMG Media Ltd. v. DDIT

[TS-483-ITAT-2015(Mum)]

India-UK DTAA

Mumbai Tribunal

Payment for live coverage of cricket matches

• Taxpayer, a UK entity, was engaged in producing and delivering live audio-visual coverage of cricket match series. Once the feed was produced, it was delivered to broadcasters (licensees).

• The Tribunal observed that the taxpayer produced the feed of live coverage by using its technical expertise. Thereafter, it delivered it in digitalized signals form to the licensees. Therefore, only the final product was delivered. The taxpayer did not deliver or make available any technology/knowhow.

• Hence, the payment received for live coverage does not amount to FTS under the DTAA.

• Moreover, since the licensees become owner of the content produced by the taxpayer, the question of transfer of all the rights did not arise. Therefore, payment cannot qualify as royalty. Relied on Delhi HC Delhi Race Club [273 CTR 503].

17 Tax Digest

Case law Payment description Ruling

Cincom System Inc. v. DDIT

[TS-568-ITAT-2015(DEL)]

India-USA DTAA

Delhi Tribunal

Consideration received for providing networking facilities

• Taxpayer is a US-based company engaged in the business of providing software solution services.

• The taxpayer entered an agreement with an Indian group company (ICo) for providing access to internet and other email and networking facilities.

• The Tribunal noted that by providing access to its internet, the taxpayer provides a gateway to ICo that will facilitate call centers to make incoming and outgoing calls from India and to the people in the US. Accordingly, the taxpayer merely provided a facility.

• The Tribunal also noted that such facility was provided through use of an embedded secret software and relying on ruling of the Authority for Advance rulings (AAR) [238 ITR 296], held that such payments are in the nature of royalty under the ITL as well under the DTAA.

Guangzhou Usha International Ltd. In Re

[TS-580-AAR-2015]

AAR

Consideration received for services rendered in connection with procurement of goods

• Taxpayer, a Chinese company, provided services in connection with procurement of goods from vendors in China for an Indian company (ICo). The Taxpayer was compensated on the basis of a mark-up on its costs.

• The AAR noted that the taxpayer was not only identifying the products but also generating new ideas for ICo after conducting market research. It was also rendering various other services, which can only be performed by an expert in the specific area. Hence, the services were in the nature of FTS.

• Furthermore, the AAR distinguished the language of FTS article under India--China DTAA from that of Pakistan--China DTAA and held that the term “provision of services of managerial, technical or consultancy nature” as provided in India-China DTAA is much wider in scope than the expression “provision for rendering of any managerial, technical or consultancy services‟ as used in Pakistan-China DTAA. The AAR then relied on another AAR ruling in case of Inspectorate (Shanghai) Ltd. [AAR No.1005 of 2010], and held that the scope of “provision of services” is much wider than scope of “provision of rendering of services” and covers the services even when the same were not rendered in the other contracting state, as long as these services were used in the other contracting state.

18 Tax Digest

Case law Payment description Ruling

Vodafone Cellular Ltd. v. DCIT

[TS-577-ITAT-2015(Chny)]

Chennai Tribunal

Payment for customer support services • Payments were made by the taxpayer for support services such as field activations, vendor payment queries, field verification and customer support services such as tele-calling for bill payments, new activations.

• The Tribunal observed that it is not possible to provide such support services without technical expertise, skilled manpower and up to date technology of the service provider.

• Moreover, “human interface” is essential to fall under the purview of FTS. In this case, there was no dispute that the services involve human element.

• Therefore, these services qualify as FTS under the ITL.

19 Tax Digest

From the Tax Gatherer’s Desk

CBDT clarifies on non-applicability of Minimum Alternate Tax (MAT) to foreign companies

Post amendment vide The Finance Act, 2015 to the MAT provision w.e.f. 1 April 2015, a three-member committee (Committee) headed by Justice (Retd.) A.P. Shah was formed by the Ministry of Finance (MoF) to give recommendations on levy of MAT on Foreign Institutional Investors (FIIs)/Foreign Portfolio Investors (FPIs) for the period prior to 1 April 2015. The Committee recommended that the provisions of MAT may not be made applicable to FIIs/FPIs for the said period.

Vide press release dated 1 September 2015, the Government of India (GoI) had expressed its acceptance of the recommendations and decided that an appropriate amendment will be carried out in the ITL. Thereafter, the MoF issued another press release dated 24 September 2015, expressing its intent to amend the ITL w.e.f. 1 April 2001. According to the press release, MAT provisions will not apply to a foreign company, which does not have a PE/place of business in India.

(Refer, EY Alert dated 2 September 2015 and 25 September 2015)

CBDT simplifies procedure for furnishing NIL withholding declarations

CBDT issued a Notification No. 76/2015/F. No.133/50/2015-TPL dated 29 September 2015 for change in procedure for furnishing nil withholding declarations (declarations) by payees in Form 15G/H.

Under the new procedure effective from 1 October 2015, payees have the option to furnish such declarations in paper format or electronic format. The payer needs to assign a Unique Identification Number (UIN) to each declaration and include the information of UIN in quarterly withholding statements, which are usually furnished in electronic form. The new procedure dispenses physical furnishing of copies of declarations to the tax authority on a monthly basis, which will now form part of the reporting in the quarterly withholding statements. However, the new procedure obliges payers to preserve the declarations for a period of seven years from the end of the financial year in which declarations are received and make them available to the tax authority on requisition.

(Refer, EY Alert dated 1 October 2015)

CBDT issues a Press Release clarifying concessional tax rate of 5% on rupee denominated bonds for non residents (NRs)

CBDT issued a press release clarifying 5% tax rate on offshore Rupee Denominated Bonds (RDB) to be issued by Indian corporates pursuant to Reserve Bank of India (RBI) Circular No. 17 dated 29 September 2015. The Press Release further clarifies that, capital gains arising on such RDBs due to appreciation of the Rupee between the date of issue and the date of redemption against the foreign currency in which the investment is made, will be exempt from capital gains tax. Legislative amendment in this regard will be proposed through the Finance Bill, 2016.

(Source: CBDT Press Release dated 29 October 2015)

India signs Competent Authority Arrangement (CAA) with US in accordance with the US-India Inter-Governmental Agreement to implement the Foreign Account Tax Compliance Act (FATCA)

To enable financial institutions in India to comply with FATCA, the GoI signed an Inter-Governmental Agreement (IGA) with the Government of US on 9 July 2015, which has come into force from 31 August 2015. Article 3(6) of the US-India IGA requires the competent authorities of the US and India to enter into an agreement or arrangement in order to establish and prescribe the rules and procedures necessary to implement certain provisions in the IGA. Accordingly, on 30 September 2015, India and the US entered into the CAA under the mutual agreement procedure set forth in Article 27 of the India-US tax treaty.

(Source: IBFD)

20 Tax Digest

Treaty Updates

Protocol to treaty between India and Israel signed

A protocol to amend the treaty between India and Israel has been signed on 14 October 2015. According to the MoF Press Release dated 7 October 2015, the Protocol amends the “Exchange of Information” (EoI) Article to provide for internationally accepted standards for effective exchange of information on tax matters including bank information and information without domestic tax interest. The Protocol further provides for inclusion of LOB Article.

(Source : IBFD & MoF Press Release dated 7 October 2015)

The Indian cabinet approves protocol to amend treaty with Vietnam and Kuwait

According to the MoF Press Release, the Union Cabinet of GoI has approved the Protocols amending the Indian treaties with Vietnam and Kuwait. The protocols will update the EoI Article under the respective treaties, to meet internationally accepted standards. Protocol to India-Vietnam treaty further provides for addition of a new Article on “Assistance in the Collection of taxes”.

(Source : MoF Press Release dated 7 October and 18 November 2015)

21 Tax Digest

Happenings across the border

Kuwait Tax Authorities adopt “Virtual Service PE” concept

Kuwait’s Department of Inspections and Tax Claims has changed its approach to the interpretation of the PE concept with respect to services rendered by NRs in Kuwait. The DIT has introduced the concept of a “Virtual Service PE,” which may result in the denial of income tax relief claimed by NRs under the applicable double tax treaties of Kuwait. The Virtual Service PE concept takes into account only the duration of the contract itself, rather than the actual activities of the service provider in Kuwait. Consequently, any work or services performed under cross-border agreements, concluded by a customer in Kuwait with a NR for a period longer than the tax treaty threshold will, prima facie, create a Service PE in Kuwait, even if employees of the former are not present in Kuwait and perform their activities entirely offshore.

Earlier, Saudi Arabia had also introduced the concept of a “Virtual Service PE” on similar lines. Refer, September edition of Tax Digest for more details on this.

(Source link)

UK Tax Authorities release consultation on modified UK patent box

A joint consultation document published by the UK Tax Authorities (HMRC) and HM Treasury (HMT) on 22 October 2015 sets out the UK Government’s proposals to modify the UK patent box regime in line with the recommendations published by the Organisation for Economic Co-operation and Development (OECD) on 5 October 2015 in its report on harmful tax practices. The document seeks input from businesses on the detailed design and operation of the rules.

The proposed new regime, which will take effect from 1 July 2016, is likely to limit the benefits of the patent box according to a nexus fraction that is based on the amount of direct in-house and externally sub-contracted research and development expenditure incurred by the claimant (plus, to a limited extent, R&D sub-contracted to related parties and acquired intellectual property). This fraction is applied to profits as calculated in the current regime.

The changes are likely to be legislated in Finance Bill 2016.

(Source link)

UK Tax Authorities address tax treatment of Delaware Limited Liability Companies (LLCs)

On 25 September 2015, the HMRC issued Revenue and Customs Brief 15, setting out its practice following the recent decision of the UK Supreme Court in Anson v. HMRC [2015] UKSC 44.

It is extremely brief and states that, after careful consideration, HMRC has concluded that the decision is specific to the facts as found in the instant case. As a result, where US LLCs have been treated as companies within a group, HMRC will continue to treat the US LLCs as companies and, where a US LLC has itself been treated as carrying on a trade or business, HMRC will continue to treat the US LLCs as carrying on a trade or business. Furthermore, HMRC proposes to continue its existing approach to determine whether a US LLC should be regarded as issuing share capital.

Individuals claiming double tax relief and relying on the Anson decision will have their claims considered on a case-by-case basis.

(Source link)

Swedish Government presents final proposal on limitations to current participation exemption rules and amendments to Swedish Coupon Tax Act

On 6 October 2015, the Swedish Government presented its final proposal to the Parliament, which contains limitations to the current participation exemption rules. Under current rules, dividends received by a Swedish company are generally exempt from tax with the assumption that the shares are held for business purposes. The Swedish Government proposes limitations in relation to this tax exemption. Dividends received from a foreign company will not be exempt from tax if the dividends can be deducted as interest or similar in the distributing company.

Additionally, the Swedish Government has proposed amendments to the Swedish Coupon Tax Act wherein the anti-avoidance provision in the Swedish Coupon Tax Act will be applicable in all situations where a person or entity receives dividends, if the holding of the shares is intended to provide an illegitimate tax advantage for someone else.

22 Tax Digest

The objective of the rules is to counteract companies using differences in tax systems to avoid taxation. The Parliament is likely to vote on the new rules in December this year and the new rules are proposed to enter into force on 1 January 2016.

(Source link)

South Korea introduces one-time temporary voluntary disclosure program for offshore income and assets

Temporary measures have been introduced in South Korea to promote voluntary disclosure of unreported offshore income and assets from prior tax years for tax resident individuals and domestic entities. Offshore income and assets subject to this program are any income sourced in a foreign country and any reportable foreign financial assets as prescribed by domestic tax laws of Korea, which have not been reported to the applicable authorities by the statutory deadline.

These one-time measures are scheduled to run from 1 October 2015 to 31 March 2016 and will encourage voluntary reporting by reducing penalties and risk of prosecution associated with any previously unreported offshore income or assets that are voluntarily reported within the provided period

(Source link)

Australian treasurer introduces multinational anti-avoidance law and country-by-country reporting

Australia introduced a multinational anti-avoidance law (MAAL) in September 2015 amending the current General Anti-Avoidance Rule (GAAR) in its domestic law, to target multinational enterprises (MNEs) that artificially avoid having a taxable presence in Australia. The law applies to all global entities with revenues more than A$1 billion, which book their revenue offshore. MAAL is based on a very broad and subjective principal purpose test, i.e., where one of the principal purposes of a scheme is to obtain a tax benefit or both to obtain a tax benefit and reduce a tax liability under a foreign law. The MAAL is to apply in respect of tax benefits arising on or after 1 January 2016 without providing for any grandfathering rule. Where MAAL applies, Australian income tax may

be assessed as though the NR did have a PE in Australia, together with harsh penalties.

In addition, Australia will implement additional country-by-country (CbC) reporting requirements arising from the OECD’s Base Erosion and Profit Shifting (BEPS) initiative, including local file, master file and CbC reporting, with application to income years commencing on or after 1 January 2016.

(Source link)

Italy issues new anti-abuse rule and other measures to enhance legal certainty in tax matters

The Italian Government recently approved Legislative Decree n. 128 (decree), which is effective from 2 September 2015. The decree repeals the pre-existent anti-avoidance provision and introduces a written rule on Abuse of Law that replaces the unwritten principle developed by the Italian jurisprudence in the last years. The newly introduced rule better specifies the boundaries of an abusive behavior by also recognizing that, in the presence of proper business purposes, taxpayers should be free to pick and choose the transaction, which triggers the lowest tax burden possible. The new rule is effective from 1 October 2015 and may apply retroactively with reference to prior transactions for which no tax assessments have been issued prior to the above-mentioned date. The rule defines Abuse of Law as “one or more transactions lacking any economic substance, which, despite being formally compliant with the tax rules, achieve essentially undue tax advantages.”

Furthermore, a Cooperative Compliance Program has been introduced to enhance relationships with the tax authorities. The program allows taxpayers to agree on tax positions prior to the filing of the relevant return and obtain quick rulings and other benefits.

(Source link)

23 Tax Digest

OECD BEPS updates

OECD released its final reports on BEPS Action Plan and India’s possible approach

On 5 October 2015, the OECD released final reports on all 15 focus areas in its Action Plan on BEPS. In an accompanying explanatory statement, the OECD described the next steps in its work on BEPS, including additional work on technical matters and plans for monitoring with respect to the implementation of BEPS recommendations. The OECD described the final BEPS packages to contain recommendations that fall in several different categories:

• Agreed minimum standards: the recommendations on harmful tax practices (Action 5), treaty abuse (Action 6), CbC reporting (Action 13) and dispute resolution (Action 14)

• Reinforced international standards: the revised OECD Transfer Pricing Guidelines (Actions 8-10) and the revised OECD Model Tax Convention (including Action 7 on PE status)

• Common approaches and best practices for domestic law: hybrid mismatch arrangements (Action 2), controlled foreign company rules (Action 3), interest limitations (Action 4) and disclosure of aggressive tax planning (Action 12)

• Analytical reports: tax challenges of the digital economy (Action 1), data and analysis with respect to BEPS (Action 11) and the multilateral instrument for implementing treaty-based recommendations (Action 15)

The GoI has actively participated in the BEPS project. The GoI is expected to study the final OECD recommendations and formulate its policy response that may very soon be reflected in legislative and administrative changes to the ITL and in bilateral tax treaties, as necessary. In this context, a roundtable discussion titled “India after BEPS” was held on 30 October 2015 at Delhi, to discuss India’s approach on implementing OECD’s recommendations with the Revenue authorities. EY, along with participants from the business community, deliberated on some of the key BEPS concerns. The deliberations indicate that BEPS Actions, such as preventing tax treaty abuse, aligning transfer pricing (TP) outcomes with value creation, transparency through enhanced TP documentation,

including CbC reporting and improving dispute resolution, are priorities for the GoI. In addition, preventing base erosion through excessive financial payments and taxation of the digital economy are also likely to be addressed. The GoI may also consider refining the GAAR provisions, with regard to its interplay with the BEPS Actions that may be implemented.

International tax changes stemming from the OECD BEPS project will transform the global tax environment in which MNEs operate. India is fully committed to implementing several BEPS recommendations. Enterprises that are part of a multinational group (both Indian-headquartered and subsidiaries/affiliates of overseas headquartered group) must evaluate the implications of the likely anticipated changes for their holding/funding patterns, business models and operating structures. Enterprises also need to closely monitor legislative and tax administrative developments in India and in jurisdictions where they operate. In addition, enterprises should focus on the new reporting and TP requirements that are expected, including the requirement for CbC reporting, in order to assess whether the necessary data is available, what must be done to gain access to such data in the required form, and likely interpretations from such data. Now is the time for enterprises to prepare for significant potential changes in the international tax environment.

(Refer EY alert dated 5 November 2015)

24 Tax Digest

Additionally, refer Global alerts at links below for detailed analysis of the final reports on each of the 15 Actions

OECD releases final reports on BEPS Action Plan

OECD report on BEPS Actions -Indirect tax implications on OECD’s recommendations

Action 1

Action 2

Action 3

Action 4

Action 5

Action 6

Action 7

Action 8-10

• OECD report on BEPS Actions- low value intra-group services

• OECD report on BEPS Actions 8-10 on commodity transactions

• OECD report on BEPS Action 8- intangibles and CCAs

• OECD report on BEPS Actions 8-10 - risk and recognition,

Action 11

Action 12

Action 13

Action 14

Action 15

25 Tax Digest

Case Laws

Indirect TaxCustoms

Supreme Court

Antenna is inseparable part of base transreceiver station and liable to concessional rate of duty

Customs Tariff Act, 1975; in favor of assessee

Assessee is engaged in business of telecommunication system. It imported base transreceiver station (BTS) along with antenna and installation cable. On the whole amount, assessee paid concessional rate of duty of 5% by claiming benefit of Sr. No. 239 of Notification No. 21/2002 dated 1 August 2002 (Notification). However, Revenue argued that installation cable and antenna, being specifically covered by Sr. No. 317 of Notification, should be assessed separately at 10%. Therefore, the issue before SC was whether antenna and installation cable, which are imported along with BTS should be considered as separate items for the purposes of payment of duty or not.

The Supreme Court (SC) co-opined with the view of Tribunal, which held that antenna and installation material are part and parcel of the BTS. The SC observed that it was specifically recorded by Tribunal that there is no separate value of antenna and material indicated in the invoice, for the purpose of assessment. The SC finally held that when aerials of antenna are separately imported as independent items, they will be charged 10% duty under Sr. No. 317. On the other hand, when the same antenna is imported along with the entire BTS as one equipment in same BTS, it will be subsumed under Sr. No. 239 and chargeable at 5% duty.

Commissioner of Customs, Bangalore v. Hutchison Essar South Ltd. [2015-TIOL-210-SC-CUS]

Supreme Court

Exemption from Special Additional Duty (SAD) not available in case of goods exempted from Sales tax

Customs Act, 1962; in favor of revenue

The issue in the appeal relates to availability of SAD exemption under Notification No. 34/98-Cus dated 13 June 1998. The said Notification exempts levy of SAD on imported goods if VAT/Sales tax is levied on sale of goods after import thereof. However, proviso to the notification specifies that nil rate will not apply if importer sells the said imported goods from a place located in an area where no tax is chargeable on sale or purchase of goods. Assessee

availed benefit of Exemption notification on import of pig hair bristles and thereafter, sold the same without paying any Sales tax. Assessee contended that “goods may be exempted from sales tax but that did not mean that they were not chargeable to sales tax”.

The SC held that what was notified was addition of Entry No. 67 to the Third Schedule of Act vide Notification, which was wrongly referred to as an Exemption Notification. This resulted in no tax on notified goods. Since no tax is chargeable on the sale of such goods, the SC held that proviso to Exemption Notification gets attracted and benefit of Notification will not be available.

Commissioner of Customs, Mumbai-I v. Seiko Brushware India [2015-TIOL-203-SC-CUS]

High Court, Mumbai

Foreign brands are not entitled to avail benefits under the “Served from India Scheme” (SFIS)

Foreign Trade Policy (FTP) 2009–14; in favor of revenue

Assessee applied for Duty Credit Scrips under FTP 2009–14. Revenue found that applications were deficient on the ground that the assessee was a foreign brand and hence, not entitled to benefits under SFIS. Challenging the legality and validity of revenue’s decision, a writ application was filed by the assessee. Therefore, issue before High Court (HC) was whether SFIS benefit is available to foreign brands.

HC held that it is undisputed that the brand “Castrol India” is not an India brand. HC observed that the facts of assessee’s case are similar to case of Shri Naman Hotels Pvt. Ltd. v. The Union of India and Others [2015-TIOL-2090-HC-MUM-EXIM] wherein it was held that object of SFIS is to accelerate growth in export of services to create a powerful and unique “Served From India brand” instantly recognized and respected worldwide. This object can be achieved only by conferring benefits and giving incentives to those entities that create an Indian brand. It is not soil or piece of land, which is important but the involvement of Indian suppliers, which is predominant. Therefore, the assessee has to fulfil an eligibility criterion, which is set under FTP. Placing reliance on this case law, writ petition, challenging deficiency letters, was dismissed.

Castrol India Ltd. v. Union of India and Others [2015-TIOL-2468-HC-MUM-CUS]

26 Tax Digest

High Court, Madras

Amendment in Bill of Entry allowed even if wrong expression/language used

Customs Act, 1962; in favor of assessee

The assesse, for the purpose of paying duty under Customs Act (Act), debited Duty Entitlement Pass Book (DEPB) credit by availing benefit of exemption under Notification No.45/2002 Customs dated 22 April 2002. Later, to change the mode of paying duty, from DEPB to cash, assessee requested Department for re-assessment of their Bill of Entries. The department rejected the request holding that a re-assessment is possible only at the instance of the revenue and not at the instance of assessee. On appeal, Customs, Excise & Service Tax Appellate Tribunal (CESTAT) held that assessee should have used appropriate language, namely “amendment of Bill of Entries,” which was possible under section 149 of the Act and directed the Department to allow the assessee to carry out amendment. Aggrieved by the order of CESTAT, Department has appealed before Madras HC.

HC observed that without quoting Section 149 and without using the appropriate language relevant for action, namely “Amendment of Bill of Entries”, assessee used wrong expression “re-assessment”. HC held that what the assessee substantially wants is what matters more than the form or the language in which the prayer is couched. Department cannot take advantage of mistake by assessees, to deprive them from making use of DEPB scrip for claiming credit and also disabling them to make payment in cash. The assessees cannot be made to lose on both sides by quoting a simple provision of law.

The Commissioner of Customs (Port Exports) v. Brakes India Ltd. [2015-TIOL-2334-HC-MAD-CUS]

High Court, Delhi

Courts cannot enter the domain of policy making

Line of Control (LoC) trade policy; in favor of revenue

A policy was introduced in October 2008 for trade across the LoC to improve the relationship and to initiate trade between India and Pakistan. A list of items was issued in which trade across the LoC was permitted, which included almonds. Petitioners objected that Californian almonds

were being brought into India from Pakistan but according to the trade policy, no goods of third country origin were allowed to be traded across the LoC. Hence, they filed this petition seeking a direction to revenue for taking requisite measures to ensure that items are not illegally imported in contravention to the policy.

HC of Delhi held that power of judicial review cannot allow court to enter into the domain of policy making. Issue under consideration was of misuse of Policy. Remedy for such an issue, as contended by revenue, is making complaints in respect of transactions not entitled to be traded. Accordingly, the HC dismissed the petition by holding that mere possibility of abuse of a provision of law does not per se invalidate legislation. It must be presumed, unless contrary is proved, that administration and application of a particular law will not be done with an evil eye and unequal hand can be applied to executive policies also. Moreover, this decision will not come in the way of petitioners for making complaints.

Association of Agro Importers and Ors v. Union of India and Ors [2015-TIOL-2442-HC-DEL-CUS]

Kolkata Tribunal

Penalty cannot be imposed on assessee when duty was not properly assessed by assessing officer

Customs Act, 1962; in favor of assessee

Assessee imported GI wire falling under CTH 72179000 of Customs Tariff Act, 1975 and cleared the same on payment of appropriate duties except Education cess. Department proceeded with imposition of penalty on assessee under section 114 (a) of the Act. Aggrieved by the order of first adjudicating authority, assessee filed appeal before CESTAT.

Tribunal held that it is the duty of the Assessing Officer to properly assess import duty for every Bill of Entry and onus cannot be shifted to assessee for not calculating the correct rate of duty. Assessee promptly paid entire amount of duty demanded along with interest. Hence, it held that under the present factual matrix, this case is not fit for imposing penalty under Section 114 (a) of the Act.

Oswal Cables Pvt. Ltd. v. Commissioner of Central Excise and Customs-Siliguri [2015-TIOL-2215-CESTAT-KOL]

27 Tax Digest

Central Excise

Supreme Court

Exemption notifications are to be construed strictly; non-fulfillment of conditions of notification would result in denying benefit of exemption to assessee

Central Excise Act, 1944; in favor of revenue

The assessee was engaged in manufacture of water pump sets falling under serial no. 35 of Notification No. 10/02-CE dated 1 March 2002 (exemption notification). They cleared goods from factory at a concessional rate against normal rate, by availing benefit of exemption notification. For availing benefit of notification, therein two conditions were stipulated, which were as follows:

“(i) No credit of the duty paid on (a) inputs; or (b) capital goods exclusively, used in the manufacture of these goods has been taken under Rule 3 or Rule 11 of the CENVAT Credit Rules,2002; and

(ii) the duty is paid in cash or through account current.”

However, the assessee cleared the goods by utilizing CENVAT Credit, which was not a prescribed mode mentioned according to the aforesaid condition (ii). Tribunal decided the case in favor of assessee by observing that payment of duty with current account was only an error and assessee had not violated the more substantial condition such as no CENVAT Credit should be taken with regard to the goods. Being aggrieved, revenue approached the SC.

The Hon’ble SC held that exemption notifications are to be construed strictly and even if there is any doubt, benefit of the same should be given in favor of revenue. The SC held that the Tribunal’s approach is clearly faulty. The assessee was required to fulfill the condition in stricto senso, i.e., to pay the duty either in cash or through current account if it wanted to avail the benefit of exemption notification. Furthermore, the SC held that this bona fide mistake by the assessee will deprive the assessee of benefit of the exemption notification but it was not a case where any penalty or interest is required to be imposed.

Commissioner of Central Excise, Pondicherry v. Honda Siel Power Products Ltd. [2015-TIOL-247-SC-CX]

Supreme Court

Both input and final products are entitled to rebate under Rule 18 of CER

Central Excise Act, 1944, Central Excise Rules, 2002; in favor of assessee

The assessee exported manufactured products on payment of Excise duty and filed a claim for rebate of both input and output duties under Rule 18 of Central Excise Rules, 2002 (CER). Revenue contented that assessee was only eligible for one out of the two claims as Rule 18 contains the word “or”. Aggrieved by contentions of the department, the assessee filed revision application before Joint Secretary, Government of India, which held the issue in favor of the assessee. Department filed petition in HC, which held in favor of revenue. The issue before SC is whether or not the manufacturer/exporter is entitled to rebate of the Excise duty paid both on the input and on the manufactured product, which is exported.

The Rule 18 of CER stipulates that the Central Government may, by notification, grant rebate of duty paid on such excisable goods or duty paid on material used in the manufacturing or processing of such goods. Assessee contended that it has always been the policy of the Central Government to exempt the goods from payment of Excise duty both on the final excisable products as well as on material used in the manufacturing of goods for payment of duty if the goods are meant for export outside India. Moreover, extract of Form ARE-2 says that “Combined application for removal of goods for export under claim for rebate of duty paid on excisable materials used in the manufacture and packing of such goods and removal of dutiable excisable goods for export under claim for rebate of finished stage Central Excise Duty or under bond without payment of finished stage Central Excise Duty leviable on export goods.” Considering order of Joint Secretary, the SC held that it is the Central Government, which has framed the rules as well as issued notifications. If the Central Government itself is of the opinion that the rebate is to be allowed on both the forms of excise duties the government is bound thereby and the rule in question has to be interpreted in accordance with this understanding of the rule maker itself.

28 Tax Digest

Accordingly, SC held that the word “or” occurring in Rule 18 cannot be given literal interpretation as that is likely to lead to various disastrous results. Therefore, this word has to be read as “and” since that would bring the correct intention of the rule maker, to carry out the objectives of the Rule 18 and also to bring it at par with Rule 19.

Spentex Industries Ltd. v. Commissioner of Central Excise and Ors [2015-TIOL-239-SC-CX]

Supreme Court

Printing amounts to manufacture and hence, subject to Excise duty

Central Excise Act, 1944; in favor of revenue

The assessee purchased GI paper from market, which was already duty paid base paper. This paper was printed out according to the design and specifications of the customers. This printing was done in jumbo rolls of GIP twist wrappers. Bulk orders were received from Parle, which needed the said paper as a wrapping/packing paper to pack their goods. On the paper, logo and name of the product is printed a in colorful form. After carrying out the printing according to the requirement of the customers, the same is delivered to the customers in jumbo rolls without slitting. The issue that arose was whether printing on such duty paid GI paper amounted to manufacture. The Tribunal had held that it did not amount to manufacture.

Being aggrieved, Revenue approached the SC, which held that blank paper could be used as wrapper for any kind of product, but after the printing of logo and name of the specific product of Parle thereupon, the end use was now confined to only that particular and specific product of the said particular company/customer. Printing, therefore, was merely not a value addition. Therefore, the SC held that it had been transformed from general wrapping paper to a special wrapping paper. The end use had positively been changed as a result of the printing process undertaken by the assessee and thus, printing had resulted into a product i.e. paper with a distinct character and use of its own had originated, which it did not bear earlier. Accordingly, it held that such printing activity amounts to manufacture and that Excise duty was payable under Chapter 4811.90.

Commissioner of Central Excise v. Fitrite Packers [2015-TIOL-235-SC-CX]

Supreme Court

Assessee liable to pay interest in terms of Section 11AB, despite paying differential duty before the issuance of show cause notice

Central Excise Act, 1944; in favor of revenue

The assessee had short paid Excise duty, which was paid later by them though belatedly but before issuance of the show cause notice. For the delayed period, Revenue had imposed interest under Section 11AB of the Central Excise Act, 1944 (CEA). Being aggrieved, assessee approached the High Court, which set aside the order of Revenue placing reliance on CCE, Mangalore v. Sri Krishna Pipes Industries Limited [2004 (165) ELT 508]. Revenue being aggrieved approached the SC. It was brought to the notice of the SC that the said judgment has been overruled by the SC in Union of India and Others v. Dharamendra Textile Processors and Others [2008 (13) SCC 369]. Department contended that Explanation 2 of Section 11AB of CEA clearly states as follows - “For the removal of doubts, it is hereby declared that the interest under section 11AB shall be payable on the amount paid by the person under this sub-section and also on the amount of short payment of duty.”

Revenue thus contended that notwithstanding the fact that assessee has paid differential duty before issue of show cause notice; interest in terms of Section 11AB is liable to be charged on assessee. The assessee contended that they were not liable to pay interest in terms of Section 11A (2B) of the CE Act, since they have paid differential duty before issue of the show cause notice.

SC setting aside the HC order held in favor of the Revenue and observed that the Revenue’s contention correctly interpreted the law. Hence, the assessee was liable to pay interest in terms of Section 11AB, despite paying differential duty before the issuance of show cause notice.

Commissioner of Central Excise, Bangalore v. Toyota Kirloskar Motors [TS-612-SC-2015-EXC]

29 Tax Digest

High Court, Karnataka

Amendment to Section 35F is reasonable, does not adversely affect the right of appeal. Held that the amendment has a retrospective operation as it has no bearing on the date when a particular lis had commenced.

Central Excise Act, 1944; in favor of revenue

The petitioners challenged the amendment made on 6 Aug 2015 to Section 35F of the Central Excise Act, 1944 (CEA) which provides for pre-deposit of 7.5% for first appeals and 10% for second appeals on the total tax or tax and penalty, demanded for entertaining such appeals.

The contention of the petitioners is that the requirement of the pre-deposit is in violation of Articles 14, 19(1)(g) and 265 of the Constitution of India. Therefore, they have sought a declaration that Circular No.984/08/2014-CX issued by the CBEC is ultra vires the Constitution of India and a similar Circular F.No.15/CESTAT/General/ 2013-14 dated 4 Oct 2014, is also challenged in the instant case. A direction was sought to enable the petitioners to file their appeals without monetary pre-deposit of 7.5%, as the lis had commenced prior to 6 Aug 2014, i.e., the date on which the amendment had been enforced. It is the contention of the petitioners that as a result of the said amendment, the right to file an appeal, which is a vested right of the assessee, particularly where the cause of action has arisen prior to the amendment is adversely effected. It was also submitted that where the lis had commenced prior to amendment, the amended provision will not apply to such lis and un-amended Section 35F is likely to apply.

The issue under consideration before the Karnataka High Court (HC) was whether amended Section 35F of CEA was a piece of substantive or procedural law and whether prescribing a mandatory pre-deposit at time of filing an appeal was an unreasonable condition. Furthermore, whether such an amendment has a retrospective effect or not. The HC observed that Sections 35 and 35B of CEA are substantive law providing circumstances under which an appeal could be filed; the conditions to be followed for the purpose of exercising the substantive right as prescribed in Section 35F is a piece of procedural law. Litigant has a vested right in substantive law, but no such right exists in procedural law.

HC held that the requirement of deposit was not an onerous condition precedent for filing an appeal, particularly when there was a cap of INR100 million on the pre-deposit amount. Therefore, the condition of pre-deposit did not adversely affect the right of appeal and the said condition was not unreasonable. HC noted that if Section 35F will not be considered as retrospective operation and thus, will not apply to a lis, which had commenced prior to amendment, such that the second proviso would then become otiose and redundant. No provision of an enactment can be interpreted to make any part of it redundant. The purpose of second proviso was to obviate a situation whereby an appeal had been filed prior to amendment and same was pending before appellate authority, then the authority could exercise its discretion with regard to pre-deposit to be made. However, if no appeal had been filed prior to amendment, then the amended Section 35F will apply although the lis had commenced prior to amendment. Therefore, the HC held that this amendment has a retrospective operation as it has no bearing on the date on which the particular lis had commenced. Accordingly, as petitioners had filed appeal after amendment, their petition was dismissed.

Hindustan Petroleum Corporation Ltd v. Union of India [2015-TIOL-2637-HC-KAR-CX]

Delhi Tribunal

Third member permits excess payment of duty to be adjusted against short payment of duty in case of provisional assessment

Central Excise Rules, 2002; in favor of assessee

The assessee cleared their products, i.e., lead and zinc concentrates to their sister concerns, since the actual moisture content and arm’s length price of the products were not available at the time of clearance, the same were assessed provisionally. The provisional assessments were however later finalized. At the time of finalization, it was found that the assessee had short paid duty, which was duly demanded by the Revenue along with interest, and also rejected assessee’s adjustment of excess paid duty. The assessee placed reliance on Karnataka HC’s ruling in the case of Toyota Kirloskar Auto Parts Pvt. Ltd. v. CCE [2012-TIOL-10-HC-KAR-CX] wherein inter se adjustments of duty short paid and duty excess paid was permitted

30 Tax Digest

and it has also been held that interest is not chargeable if the duty excess paid was more than the duty short paid. The technical member had held that the assessee is not eligible to claim refund of the excess duty paid and for the period of provisional assessment did not permit inter se adjustments of excess duty payment during final assessment. However, the Judicial Member differed with the above view of the technical member and held that the excess duty paid is required to be adjusted against the short paid duty and that the assessed duty liability had to be arrived at accordingly. Furthermore, also stated that interest liability would arise only in respect of short fall of duty, which has to be arrived at after taking into account the overall short and excess payments made by the assessee. In view of a difference of opinion between the two members, the matter was placed before the third member.

The third member agreed with the findings of the judicial member and held that the facts of this case are similar to Toyota Kirloskar Auto Parts Pvt. Ltd. (supra). Therefore, it held that it is the total duty payable of all the goods, which are subject matter of provisional assessment and final assessment, which is to be taken into consideration. The excess duty paid by the assesse is more than the duty short paid by them and therefore, assessee was not required to pay any duty. Consequently, no interest was also payable. After taking into consideration duty payable in respect of all goods and duty paid in pursuant to the final assessment order, if still, any dues are pending, then for such short fall in payment of duty, the assessee is liable to pay interest. Therefore, by a majority order, the impugned order was set aside and the appeal of the assessee was allowed.

Hindustan Zinc Ltd v. CCE, Jaipur [2015-TIOL-2427-CESTAT-DEL]

31 Tax Digest

Mumbai Tribunal

Credit is allowed for such input, which are required for manufacture, irrespective of fact that certain by-products have emerged; held that no reversal is required under Rule 6(3)

Central Excise Act, 1944, CENVAT Credit Rules, 2004; in favor of assessee

The assessee uses blast furnace for manufacture of steel. During the process of steel manufacture, certain gases are released in the furnace. These gases usually consist of carbon monoxide, carbon dioxide etc. These gases are at very high temperature and it is possible to recover the heat from these gases, for use and sale. The assessee sells these gases to their neighboring unit, which manufactures cement. Incidentally, the blast furnace gases are exempt from Excise duty by virtue of Notification No.76/86-CE, dated 10 Feb 1986 and later by Notification No.17/2011-CE, dated 1 Mar 2011. In view of the fact that the assessee are manufacturing dutiable excisable goods and also clearing blast furnace gases at nil rate of duty, revenue alleged that they were hit by the mischief of Rule 6 of CENVAT Credit Rules, 2004 (CCR).

The assessee placed reliance on the Supreme Court’s (SC) decision in Hindustan Zinc Limited [2014-TIOL-55-SC-CX] wherein it was held that so long as the quantity of input required for the manufacture of dutiable final products does not change and production of by-product is inevitable, it cannot be said that the inputs have been used for the production of by-products. They also relied on letter F.No. B-4/7/2000-TRU dated 3 April 2000 wherein it was clarified that CENVAT credit will be admissible in respect of the amount of inputs contained in any of the exempted waste, refuse or by-product.

The Tribunal inter alia observed that the SC in Hindustan Zinc Limited (Supra), had interpreted Rule 6(1) to mean that credit of that quantity of inputs, which are necessary to manufacture the intended quantity of final product will be allowed. If in that process certain unintended by-products emerge as a technical necessity then it cannot be said that part of the said inputs have been used in manufacture of the by-products. In other words the credit of that quantity of raw material was held to be allowed, which is required for manufacture of the intended quantity

of final products, irrespective of the fact that certain by-products emerge as technical necessity. The SC had laid down the ratio that when a by-product emerges as a technical necessity, it cannot be said that any inputs have been used for the manufacture of the by-product. Furthermore, ruling in favor of the assessee the Tribunal also placed reliance on the CBEC clarification dated 3 April 2000, which supported SC ratio.

JSW Steel Ltd v. CCE, Navi Mumbai [2015-TIOL-2432-CESTAT-MUM]

CENVAT credit

High Court, Madras

Duty paid by job-worker which was not liable to be paid, is eligible for credit in hands of principal manufacturer

CENVAT Credit Rules, 2004; in favor of assessee

The principal manufacturer handed over raw materials to the job worker for carrying out certain job work. The goods were handed over after availing credit for the inputs. Such job-work was exempt under Notification No. 214/86 dated 25 March 1986. After carrying out the job work, the job worker raised invoices on goods processed, for amounts including the duty that it paid. According to the Revenue, the job worker was not even liable to make payment of duty. However, since the duty was paid by job worker and also claimed from principal manufacturer, principal manufacturer had claimed credit. The issue before the High Court is whether the manufacturer is entitled to claim credit for duty paid by job worker or not.

The Madras HC placed reliance on the earlier SC ruling, i.e., CCE&C v. Narmada Chematur Pharmaceuticals Ltd. 2005 taxmann.com 484. It was held in this case that credit of duty paid by the job worker even when he is not required to pay it, can be availed by the principal manufacturer. It was held that, since duty was paid by the assessee both times, credit was available and it could not be construed as a double benefit by applying theory of unjust enrichment.

Commissioner of Central Excise, Chennai-III Commissionerate v. Sundaram Auto Components Ltd [2015] 62 taxmann.com 242 (Madras)]

32 Tax Digest

Mumbai Tribunal

Unutilized CENVAT credit on closure of business is allowed as refund

CENVAT Credit Rules, 2004; in favor of assessee

The assessee manufactured excisable goods for a few years and then closed down their operations. They filed a refund application, along with Excise returns (ER), for unutilized CENVAT credit on the date of closure of business. The department rejected the claim on the ground that in terms of Rule 11(2) of CENVAT Credit Rules, 2004 (CCR), unutilized credit lapses on closure of unit. The assessee placed reliance on the Karnataka High Court’s decision in case of Slovak India Trading Co. P Ltd. 2008 (10) STR 101 (Kar), in which it was held that CCR do not expressly prohibit refund of unutilized credit where there was no manufacture on closure of factory. Since assessee had come out of CENVAT scheme, refund of unutilized credit had to be made in terms of Section 11B of Central Excise Act, 1944. This judgment was upheld by the Apex Court in 2008.

Tribunal held that judgments cited by the assessee were fairly applicable in the instant case. The ER submitted by the assessee along with the refund application was held to be sufficient to grant refund.

Century Rayon – Twisting Unit v. Commissioner of Central Excise, Thane I [TS-541-CESTAT-2015-EXC]

Ahmedabad Tribunal

CENVAT credit of duty paid on exempted goods allowed, but not allowed of the amount paid under Rule 6(3) of CCR

CENVAT Credit Rules, 2004; partially in favor of assessee

The assessee was engaged in manufacture of syringes. They received parts and accessories of syringe with nil rate of duty vide Notification No. 6/2002-CE dated 1 March 2002. However, the supplier of the parts and accessories charged and paid Excise duty at 16%. The assessee availed credit of same but the Department argued that CENVAT credit cannot be availed as the said parts were exempted. Tribunal held that assessee is entitled to avail CENVAT credit, since it is consistently viewed by the Hon’ble High Court and the Tribunal that the jurisdictional officers

of recipient of inputs have no authority for assessment of the duty paid by input supplier and assessee has not contravened provisions of Rule 3 of CCR for availing credit.

Another issue, which arose was whether the amount paid by manufacturer of inputs under Rule 6(3) of CCR (for reversal of credit on inputs used in exempted goods), shown in invoice as excise duty, was allowed as credit or not. Rule 3 of CCR, provides that a manufacturer will be allowed to take credit of duty of excise and other duties as specified therein. Amount paid under Rule 6(3), is not duty but it was shown in invoice as duty. Therefore, Tribunal held that the assessee was not eligible to avail credit of that amount. Furthermore, it was held that in the instant case, the assessee was aware about the amount not being duty, since it was earlier engaged in the manufacture of parts of syringe and was paying amount under Rule 6(3).

Aman Medical Products Pvt. Ltd v. Commissioner of Central Excise and Service Tax, Daman [2015-TIOL-2362-CESTAT-AHM]

Chennai Tribunal

Assessee will be eligible for refund under Rule 5 of CCR, 2004 even if separate notification was issued

CENVAT Credit Rules, 2004; In favor of assessee

The assessee, an exporter of services, applied for refund of unutilized CENVAT credit on input services. Revenue denied the claim on the ground that since it was specifically governed by Notification No.9/2009 ST dated 3 March 2009. Furthermore, the assessee should have chosen the route under the said notification instead of submitting its claim under Rule 5 of CENVAT Credit Rules, 2004 (CCR). Therefore, the issue before Tribunal was whether assessee will be eligible for refund under Rule 5 of CCR even if separate notification was issued.

Tribunal observed that two options available with the assessee are, either pay tax on service availed and claim the refund or avail taxable services free of tax. For availing taxable services free of tax, such services are required to be specified and approved by appropriate authority. Although, it is one of the regulatory modes to grant benefit, it does not create embargo on the service recipient, consuming the taxable service, in respect of entitlement to credit and refund. Section 83 of the Finance

33 Tax Digest

Act, 1994 includes Section 11B of the Central Excise Act (CEA), 1944 for refund.

Rule 5 of CCR, being integral part of CEA 1944, it is fundamental principle that supplemental provision does not override fundamental provision. The Tribunal held that the route of processing refund under Finance Act through section 11B of the CEA cannot be denied.

Ugam Solutions Sez Pvt. Ltd v. Commissioner of Central Excise, Coimbatore [2015-TIOL-2235-CESTAT-MAD]

Mumbai Tribunal

Input service also includes service to set up premises of service provider

CENVAT Credit Rules, 2004; in favor of assessee

The assessee, a cricket association, provided services of renting of immovable property. They constructed a cricket stadium and received architect services and design services from certain consultants. After paying service tax on reverse charge basis, they took CENVAT Credit of the same. A show cause notice was issued to the assessee in terms of Rule 14 of CCR, relying on provisions of CCR and Circular No. 98/01/2008 ST dated 4 January 2008, contending that such service tax was not available as credit and liable to be recovered. Therefore, issue under consideration was whether services such as architect services, consulting engineers’ services, management consultancy services etc., used for construction of sports stadium are admissible input services for taking CENVAT Credit.

The Tribunal, on analysis of the definition of “input service”, clarified that the “input service” was not limited to services for providing output service, but it also included service for setting up premises of provider of output service. Tribunal held that the said circular is contrary to the definition of input service under CCR, 2004 and is therefore not tenable. Furthermore, since there is no tax or ED on construction of premises of output service provider, legislators included such services as input services. Hence, the credit of input services used for setting up the premises of service provider must be allowed. Tribunal also relied on Andhra Pradesh HC decision in which it was held that without use of cement and TMT bars, “storage and warehouse services” could not have been provided.

Accordingly, CENVAT Credit was allowed on cement and TMT bars.

Therefore, the Tribunal held that the assessee was entitled for CENVAT Credit in respect of all services used for construction/setting up of stadium.

Maharashtra Cricket Association v. Commissioner of Central Excise, Pune III [2015-TIOL-2418-CESTAT-MUM]

Service tax

High Court, Sikkim

Buying and selling lottery tickets does not fall within the meaning of service and hence, levy of Service tax is clearly unsustainable

Finance Act, 1994; in favor of assessee

The assessee was engaged in business of sale of lottery tickets organized by State Government whereby they procured lottery tickets in bulk from the Government and resold the same to public at large through various agents, stockists, resellers. After the amendment in Finance Act 2015, revenue issued letters to the assessee in respect of services provided by lottery distributors and selling agents. Revenue contended that the assessee was amenable to Service Tax on reverse charge as mentioned under sub-clause (7C) of Rule 6 of the Service Tax rules (STR), 1994.

On analyzing the agreement, HC observed that the activity of assessee did not establish principal and agent relation. In fact it was a buyer and seller relation on principal to principal basis. Moreover, there was no privity of contract between Government and stockists, agents, resellers. Hence, their activity does not fall within the meaning of “service” as provided under Clauses (31A) and (44) of Section 65B and, therefore, is outside the purview of Explanation 2 to the said Section.

Accordingly, HC rejected the letters requiring assessee to pay tax, in the absence of specific provision in Finance Act. Furthermore, Sub-Rule (7C) of Rule 6 of STR, 1994 only provided an optional composite scheme for payment of tax and does not create a charge of service tax. Therefore, the HC held the levy of reverse service tax vide Notification No.7/2015-ST dated 1 March 2015 is clearly unsustainable and liable to be struck down.

Future Gaming and Hotel Services Pvt. Ltd. v. Union of India [2015-TIOL-2398-HC-SIKKIM –ST]

34 Tax Digest

High Court, Madras

Service tax applicable on flats constructed and allotted to landowner against land transfer

Finance Act, 1994; in favor of revenue

The assessee, a provider of construction service, entered into joint venture agreement with land owner for construction of flats. Out of the total flats, some are to be owned by the assessee and remaining by the land owner as its share equivalent to land. The assessee paid service tax on sale of flats owned by him but no tax was paid on flats given to land owner, claiming that they have not received any amount from land owner. The department demanded tax on such flats as the construction of residential complex service was provided under section 65(105)(zzzh). Commissioner (Appeals) confirmed the demand. Aggrieved by this, the assessee challenged the order in Tribunal along with an application for waiver of pre-deposit.

The assessee contended that they have not received any consideration in the form of money from land owner and therefore, tax should be demanded on basis of cost of land. Relying on Rule 3 of Service Tax (Determination of value) Rules, 2006, Tribunal held that value for flats given to land owner should be equivalent to gross amount charged by the assessee to provide similar service to any other person and dismissed application for waiver of pre-deposit of entire amount. During proceedings before HC, assessee contended that service provided by them was of works contract under section 65(105)(zzzza) and was eligible for benefit of notification no. 29/2007-ST dated 22 May 2007. HC observed that assessee was engaged in construction of residential complexes & not engaged in works contract. Furthermore, when there is no monetary consideration in transaction, section 65 provides various methods for valuation. HC held that Tribunal’s order for pre-deposit is justified as service was taxable and valuation methods were provided for cases of no money received. Court dismissed the appeal holding that no substantial question of law arises from appeal.

Southern Properties & Promoters v. The Commissioner of Central Excise [2015-TIOL-2607-HC-MAD-ST]

Mumbai Tribunal

Intellectual Property Right (IPR) not covered by Indian laws will not be covered under the category of IPR Services

Finance Act, 1994; in favor of assessee

The assessee engaged in software development and consultancy services, obtained license to use technical information, know-how and system software relating to manufacture of Document Processing System. Assessee paid royalty on an ongoing basis to provider of license at fixed percentage of sales. Show cause notice was issued to the assessee proposing to levy service tax on royalty paid under the category of IPR services. The issue before tribunal is whether transfer of technical “know how” received by assessee can be categorized under IPR services.

The Tribunal observed that no records show which type of IPR is being assigned to “technical knowhow” received by assessee. Definition of IPR clearly states that the right has to be a specific right under specific law. The definition of taxable service includes only such IPRs that are prescribed under law for the time being in force. Therefore, considering definition of IPR, Tribunal held that IPR not covered by the Indian laws will not be covered under taxable service in the category of IPR services.

Tata Consultancy Services Ltd v. Commissioner of Service Tax, Mumbai [2015-TIOL-2370-CESTAT-MUM]

Mumbai Tribunal

Service tax not to be charged on services rendered by assessee beyond the territorial waters of India

Finance Act, 1994; in favor of assessee

The assessee, an advertising agency, had undertaken an advertisement campaign for the Ministry of Tourism, Government of India, to campaign for India as a tourist destination in print and electronic media and outdoor hoardings in some countries other than India. It discharged service tax liability on amount of agency commission received. Revenue contended that assessee was also liable to pay tax on amount of rent and other expenses incurred on hoardings and would get covered under category of Advertising Agency Services. The dispute was regarding

35 Tax Digest

value that needs to be added for discharging service tax liability.

The Tribunal held that media costs were incurred by the assessee beyond the territorial waters of India and the ratio of judgment of Cox and Kings [2014 (35) STR 817 (Tri Del)] will be directly applicable. It was held by the Tribunal in case of Cox and Kings that for services rendered by the assessee beyond the territorial waters of India, service tax would not be charged even if the tour emanates from India and ended in India and even if tourists being Indians. Accordingly, amount of rent and other expenses incurred on hoardings will not be included in value.

Grey Worldwide (India) Pvt. Ltd. v. Commissioner of Service Tax, Mumbai [2015-TIOL-2057-CESTAT-MUM]

Mumbai Tribunal

Excess baggage charges are an integral part of main service, i.e., transportation of passengers by air and not taxable under the category of “Transportation of Goods by Air”

Finance Act, 1994; in favor of assessee

The assessee was providing services of transport of passengers and goods by air. A passenger was entitled to carry baggage up to a certain limit. Over and above the limit, the assessee charged excess baggage charges. Revenue contended that excess baggage charge was taxable under the category of transport of goods by air whereas the assessee contended that it was an integral part of the service of transport of passenger by air. Therefore, issue under consideration is whether excess baggage charges can be taxed under separate category “transport of goods by air”, considering above facts.

The Tribunal observed that when taxable service comprises more than one service then such services will be classifiable under the head, which gives its essential characteristic. In the current scenario, main service provided was transportation of passenger by air. Therefore, by majority view Tribunal held that the excess baggage charges collected by the assessee were integral part of the service “transport of passengers by Air”. Extended period of limitation and penalty were not invokable as there was no suppression of facts on the part of assessee.

Kingfisher Airlines Ltd, Jet Airways Ltd v. Commissioner of Service Tax [2015-TIOL-2329-CESTAT-MUM]

VAT/CST

Supreme Court

Input tax credit allowed in cases where a particular transaction is not taxable, since there is a difference between exemption to goods and for specified sale transactions or dealers

Rajasthan Value Added Tax Act, 2003; in favor of assessee

The assessee was engaged in the business of manufacturing asbestos cement pressure pipes and sheets (A.C. sheets). It availed input tax credit on the purchase of raw material used in manufacture of A.C. sheets. Revenue passed orders under Section 22 of the Act disallowing the credit and charged interest. The assessee filed second appeals before the Rajasthan Tax Board, which dismissed the appeals and opined that the assessee, a manufacturing unit, had not been charged on the sales of its product, according to the notification, which squarely falls under the definition of exempted goods and hence, the final product was exempted, but it was not entitled to avail input tax credit according to notifications. Revision petition was filed by the assessee before HC, which held that the scheme of Section 8 of the Act, which deals with exemption of tax and the notification issued clearly states that the manufacturer of asbestos cement sheets and bricks have been exempted and, therefore, it could not be said that A.C. sheets were exempted goods, which is the pre-requisite for denying input tax credit. HC placed reliance on the judgment of ACTO v. Abishek Granites Ltd. [23 Tax-world 285] to buttress the proposition that exemption to unit is different from the exemption to the transaction of sale of the commodity. Therefore, special leave petition was filed by revenue before the SC.

The SC, on a careful scrutiny of the order passed by the HC, observed that the HC has proceeded on the foundation that there was a distinction between the exempted units and exempted sales.

The SC also observed, on an analysis of the scheme of the Act, that there is difference between exempted goods, i.e., goods on which no VAT is payable and are, therefore, not taxable and other cases where a particular transaction when it satisfies specific condition is not taxable. When the goods are exempt, there will be no taxable transactions

36 Tax Digest

or exemption to a taxable person. In other cases, goods might be taxable, but exemption could be given in respect of specified transactions from liability of tax or exemption to a taxable person, though the goods are taxable. Such exemptions operate in circumscribed boundaries and not as expansive as in the case of taxable goods.

The SC held that the goods remain taxable goods though exemption stands granted to a particular individual or a specified transaction. All subsequent transactions in those goods, which are not specifically exempt and not undertaken by an exempted person, could be subjected to taxation.

The SC also observed that if the revenue contention, the assessee though covered by exemption notification could be at a disadvantage because finally when the subsequent sale is made by a non-exempted dealer or tax stands paid on the non-exempted transfer, the goods, i.e., A.C sheets, will have to pay tax on the entire sale consideration. Therefore, appeal was dismissed and input tax credit was allowed.

Commercial Taxes Officer v. A Infrastructure Ltd [2015-TIOL-279-SC-VAT]

High Court, Bombay

VAT leviable on supply of petroleum products to various incoming and outgoing vessels within or beyond the port limits, if substantial part of the transaction takes place within the State

Maharashtra Value Added Tax Act, 2002; in favor of revenue

Petitioner was engaged in the business of “Bunker Supplies,” which mainly involved the supply of motor spirits to incoming and outgoing vessels within and beyond port limits of Mumbai. It claimed exemption under Maharashtra Value Added Tax Act, 2002 (MVAT Act) on sale of High Speed Diesel Oil (HSD) on the grounds that the goods were supplied by barges to vessels located beyond 1.5 nautical miles in high seas and MVAT Act cannot apply to territorial waters controlled by the Union. VAT authorities issued notices for levy of tax on the same. Therefore, issue before the HC was whether the sales were made within the State or not, to levy tax.

The HC observed that the petitioner placed an order on the oil companies within the state to supply a fixed quantity of petroleum product to the petitioner, which will further enable it to fulfil its contractual obligations. Moreover, it was observed that the manufacturers of the goods as well as the oil refineries were within the state. The petitioner’s place of business was also at Mumbai. The contract was also placed and finalized in Mumbai, though the barges of the petitioner and vessels of manufacturers as well as buyers were stationed in territorial waters. Therefore, there was sufficient territorial nexus for the MVAT Act to apply. Since substantial part of the transaction, i.e., from the stage of acquisition of the goods, paying for them, receiving an indent or order from the shipping lines and further communications, has taken place within the state, it was held that MVAT will be leviable on the supply of petroleum products.

Raj Shipping & Anr v. State of Maharashtra [2015-VIL-457-BOM]

High Court, Delhi

Credit of input tax paid on Duty Entitlement Pass Book (DEPB) scrips cannot be denied if it has affected the cost of the product sold, either directly or indirectly

Delhi Value Added Tax Act, 2004; in favor of assessee

Petitioners were engaged in the business of import and sale of goods. They purchased DEPB scrips on payment of VAT and used the same for payment of customs duty on imports made by them. Thereafter, the petitioners sold the imported material in the local market and adjusted input tax paid on purchase of DEPB scrips against the output tax liability. Revenue denied the input tax credit in respect of the VAT paid on DEPB scrips on the ground that it could not be construed as “used” even indirectly for making the sale of imported goods. Therefore, issue under consideration was whether the petitioners were entitled to input tax credit on purchase of DEPB scrips.

HC observed that the component of customs duty was reduced to the extent of usage by dealer of DEPB scrips. The reduced customs duty was embedded in the resale price of imported goods. Therefore, the use of DEPB scrips is for the purpose of selling the imported goods. ”Usage” in this context has to be seen as a use that affects the price of the goods although it may not be used tangibly in the

37 Tax Digest

goods. Moreover, in order to avail the input tax credit it was not necessary that petitioners had to be dealers in the same commodity.

Accordingly, the Court held that, since the DEPB scrip had impacted the cost of product sold, either directly or indirectly, the credit of input tax paid on DEPB scrip cannot be denied to the petitioners.

Jagriti Plastics Ltd. & Anr vs. Commissioner of Trade & Taxes [2015-VIL434-DEL]

High Court, Karnataka

Supply of “demineralized water” in medicinal injections taxable as composite works contract

Karnataka Value Added Tax Act, 2003; in favor of revenue

The assessee entered contracts for the manufacture and supply of medicinal pharmaceutical injections of different varieties. In the course of the contract, the assessee manufactured WFI (water for injection), i.e., demineralized water, which is used in the manufacture of injections. Assessing authority levied tax on WFI/DM (De-mineralized water), which was used as an input, by treating the contract executed by the assessee as a composite works contract involving transfer of property in goods. The assessee contended that water was an exempted commodity according to Entry no. 54 of the First Schedule to Karnataka Value Added Tax Act, 2003 (KVAT Act) and that the contract entered into was a pure service contract.

The HC observed that manufacture of WFI/DM water involved specialized processes. It was demineralized water falling under clause (i) of Entry no. 54, i.e., exclusion to the entry. Hence, WFI/DM water was not exempted. The HC also noted that 46th Constitutional amendment empowers the states to bifurcate and levy Sales tax on value of material involved in a contract. Moreover, the Apex court, in case of Larsen & Toubro Ltd. [2014 (1) SCC 708], held that the dominant nature test will be confined to a composite transaction not covered by Article 366 (29A).

The HC held that the contract was composite works contract involving transfer of property in goods as well as labor and service. Therefore, the supply of WFI/DM will be subject to tax under the KVAT Act.

Hicure Pharmaceuticals Pvt. Ltd. v. The Deputy Commissioner of Commercial Taxes [2015-VIL-453-KAR]

High Court, Karnataka

Supply of smart cards to the Transport Department is a contract for labor and service, and cannot be held as sale

Karnataka Value Added Tax Act, 2003; in favor of assessee

The assessee, engaged in the provision of information technology services, entered an agreement with the Transport Department for the installation and implementation of computer systems, smart card facility and installation of project facilities at respective transport offices. In terms of the agreement, the assessee was required to ensure that the smart cards were specifically designed and developed for the transport department. Revenue authorities issued a show cause notice proposing to levy tax on sale of smart cards by the assessee. The assessee argued that the entire project was a service contract and consumption of smart cards was only incidental to the contract and a major value of the contract was toward providing information technology services.

Therefore, the issue before the HC was whether the contract was for sale of smart cards or for rendering of services. The HC noted that the Apex Court in the case of Idea Mobile Communication Limited v. Commissioner of Central Excise and Customs, Cochin [2011 (43) VST 1 (SC)], held that SIM cards are considered as part and parcel of services provided and value of the same formed part of activation charges, since no activation was possible without a proper functioning of a SIM card. It also emphasized that essential test to be satisfied before an article is said to be “goods” is the test of marketability. Such goods must be bought and sold in the market and must have a distinctive name, character or use. Smart cards produced by the assessee had no utility or value to any person other than the transport department.

Another important aspect emphasized by the HC was that smart cards also contained the official logo of the State Government along with key management microchip. Therefore, smart cards were not commodities saleable in an open market and would not have fetched any commercial value in market. It was thus held that supply of smart cards to the transport department cannot be held as sale and it was a contract for labor and service.

Zylog Systems Pvt. Ltd. v. Addl. Commissioner of Commercial Taxes [2015-VIL-433-KAR]

38 Tax Digest

High Court, Madhya Pradesh

Provision of passive infrastructure and related services to telecommunication operators not subject to VAT, since it was merely a permissive use of the infrastructure for a limited purpose

Madhya Pradesh Value Added Tax Act, 2002; in favor of assessee

The assessee was engaged in providing passive infrastructure and related operations and maintenance services to telecommunication operators on a shared basis. It considered this transaction as “Business Support Service” and paid Service tax on the same. Revenue sought to levy VAT on the transaction considering it as transfer of title in goods.

Therefore, the issue under consideration was whether the provision of passive infrastructure services by the assessee to operators will tantamount to transfer of right to use goods and liable to VAT under Madhya Pradesh Value Added Tax Act, 2002 (MP VAT Act).

On perusal of the agreement, HC observed that the right, title, possession and control in passive infrastructure located at telecommunication site vested solely with the assessee. Furthermore, from the contractual clauses it was clear that it was the responsibility of the assessee to ensure that the passive infrastructure functions to its full efficiency and potential. The HC held that the limited access provided to telecom operators could only be regarded as a permissive use or limited licence to use the infrastructure.

The HC placed reliance on judgment of the Karnataka HC in case of Indus Towers Limited v. The Deputy Commissioner of Commercial tax [2012 (285) ELT 3 (Kar)] wherein it was held that right to use passive infrastructure could be said to have been transferred only if possession of the same had been transferred. It was held that the decision of the Karnataka HC will be fully applicable to this case and therefore, quashed the order passed by the revenue authorities.

Bharti Infratel Ltd. v. State of Madhya Pradesh & others [TS-445-HC-2015(MP)-VAT]

39 Tax Digest

Key statutory updates

Customs

CBEC lays down guidelines to reduce delay in assessments

CBEC directs that genuine clarifications sought from importers/exporters should be raised in one go and suggests listing/sensitizing the trade of queries frequently raised in the course of assessment. The Board also suggests that the time taken after answering the queries should further be curtailed and in fact documents that are delayed are accorded priority after receipt of satisfactory reply from importers. It directs all Chief Commissioners to devise a mechanism for monthly update/review of the same. Chief Commissioners should also consider suitable sensitization of importers about most common errors to avoid delays in completion of reassessment.

Circular No. 22/2015-Cus dated 3 September 2015

CBEC clarifies payment of safeguard duty is rebatable as Drawback

With respect to safeguard duties, which are leviable under Section 8B or Section 8C of the Customs Tariff Act, 1975, the Board clarifies that these are rebatable as Drawback in terms of Section 75 of the Customs Act. Where imported goods subject to safeguard duties are exported out of the country as such, then the Drawback payable under Section 74 of the Customs Act would also include the incidence of Safeguard Duties as part of total duties paid, subject to fulfilment of other conditions.

Circular No. 23/2015-Cus dated 29 September 2015

CBEC eliminates printouts in Customs clearance; paper-based GAR 13 forms, TR 6 challans, TP copy and shipping bills are phased out

F. No 450/25/2013- Cus IV dated 1 October 2015

CBEC issues guidelines on valuation of import of second-hand machinery

CBEC issues guidelines on valuation of import of second-hand machinery in supersession of Circular No. 4/2008-Cus dated 12 February 2008. The same will be valued on the basis of “transaction value” under Rule 3 of Customs

Valuation (Determination of Value of Imported Goods) Rules, 2007, except when requirement of said Rule is not met.

Inspection/appraisement reports issued by a Chartered Engineer (Form-A) based in the country of sale of second-hand machinery will be accepted by all Customs Houses. However, in case the said report cannot be procured, goods may be inspected by DGFT notified agencies, or by locally empanelled Chartered Engineer, where notified agencies are not present.

Value declared by importer will be examined with respect to Chartered Engineer’s report and depreciated value of goods determined in terms of Circular No. 493/124/86-Cus VI dated 19 November 1987 and dated 4 January 1988. In case the comparison does not create any doubt, goods may be appraised under Rule 3, else a proper officer will determine value sequentially in terms of Rule 4 to Rule 9 where differences are significant and importer is not able to explain the same satisfactorily.

Circular No. 25/2015-Cus dated 15 October 2015

CBEC directs use of digital signature for submission of documents for the purpose of customs

The Board has decided that all importers, exporters using services of Customs brokers for formalities under Customs Act, 1962, shipping lines and air lines will file customs documents under digital signature certificates mandatorily with effect from 1 January 2016. Furthermore, wherever the customs process documents are digitally signed, Customs will not insist on the user to physically sign the said documents.

Circular No. 26/2015-Cus dated 23 October 2015

Central Government amends Customs, Central Excise and Service Tax Drawback Rules, 1995 effective from 23 November 2015

Vide this Notification wheat exporters can now function under the brand rate mechanism. Rule 7 has been amended so that the Central Government may specify an amount for payment as provisional drawback by proper officer of Customs.

Notification No. 109/2015-Cus Non-Tariff dated 16 November 2015

40 Tax Digest

Central Government notifies revised All Industry Rates of Duty Drawback with effect from 23 November 2015

AIR for gold and silver jewelry/articles is reduced. Furthermore, composite rates of items such as leather hand bags, readymade garment of cotton and wool is increased. Iron and steel, electrical machinery and ships have been provided with increased customs rate of 2% with certain exceptions.

Notification No. 110/2015-Cus Non-Tariff dated 16 November 2015

Circular clarifying amendments made in Drawback Rules and AIR vide Notification No 109 and 110 dated 23 November 2015

These AIRs broadly take into account parameters such as prevailing prices of input, input-output norms, rates of customs and central excise duties, incidence of service tax paid on taxable input services used in manufacture of export goods and incidence of duty on HSD/furnace oil, value of export goods, etc.

CBEC specifies payment as provisional drawback amount as equivalent to Customs component of AIR corresponding to export goods, if applicable, and subject to same conditions as applicable to a claim when CENVAT facility has been availed.

It clarifies that brand rate facilitation in terms of Para’s 5A-5C of Instruction No. 603/01/2011-DBK would continue and there should not be any delay by Central Excise formations in finalizing applications for fixation of brand rate. Furthermore, Commissioners must ensure that exporters do not avail refund of service tax paid on taxable services, which are used as “input services” in manufacturing or processing of export goods.

Circular No. 29/2015-Cus dated 16 November 2015

Customs duties further reduced on specified goods originating from Singapore and imported to India in terms of the Comprehensive Economic Co-operation Agreement

Notification No. 53/2015-Cus Tariff dated 23 November 2015

Custom duties exempted on all raw material and parts for use in manufacture of certain specified ships/vessels subject to actual user condition

Requirement of manufacturing of ships/vessels in a custom bonded warehouse under the provisions of Section 65 of the Customs Act, 1962 for availing duty benefits is removed.

Notification No. 54/2015-Cus Tariff dated 24 November 2015

Amendment made in Notification No. 52/2003-Customs dated 31 March 2003 to enable EOUs to become eligible for duty exemption on raw material/parts consumed in manufacture of certain specified ships/vessels and cleared to DTA

Exemption is available even if such ships/vessels are exempt from basic customs duty and central excise/countervailing duty

Notification No. 55/2015-Cus Tariff dated 24 November 2015

Safeguard duty Notifications

Levy of provisional safeguard duty on hot-rolled flat products of non-alloy and other alloy steel in coils of a width of 600 mm or more (heading 7208 or tariff item 7225 30 90) at the rate of 20% for a period of 200 days.

Notification No. 02/2015 Cus(SG) dated 14 September 2015

41 Tax Digest

Anti-dumping duty (ADD) notifications

The Central Government imposes definite ADD for a period of five years on the following items:

• Import of Acrylonitrile Butadiene Rubber, originating in or exported from Korea RP

Notification No. 46/2015-Cus (ADD) dated 4 September 2015

• Import of 2 mm to 12 mm (both inclusive) thick float glass of clear as well as tinted variety (other than green glass) but not including reflective glass, processed glass meant for decorative, industrial or automotive purposes falling under chapter heading 7005 of the First Schedule to the Customs Tariff Act, originating in or exported from the Peoples’ Republic of China

Notification No. 47/2015-Cus (ADD) dated 8 September 2015

• Import of plain medium density fiber board of thickness 6 mm and above , originating in or exported from the People’s Republic of China, Malaysia, Thailand and Sri Lanka

Notification No. 48/2015-Cus (ADD) dated 21 October 2015

• Import of front axle beam and steering knuckles for medium and heavy commercial vehicles, originating in or exported from the People’s Republic of China

Notification No. 49/2015-Cus (ADD) dated 21 October 2015

• Import of imports of hexamine, originating in or exported from the People’s Republic of China and the UAE

Notification No. 50/2015-Cus (ADD) dated 21 October 2015

• Import of all Fully Drawn or Fully Oriented Yarn/Spin Draw Yarn/Flat Yarn of Polyester (non-textured and non POY), originating in or exported from the People’s Republic of China and Thailand

Notification No. 51/2015-Cus (ADD) dated 21 October 2015

• Import of carbon black used in rubber applications, originating in or exported from China PR and Russia

Notification No. 54/2015-Cus (ADD) dated 18 November 2015

Foreign Trade Policy (FTP)

Notification/Circulars

DGFT clarifies regarding the applicability of Para 5.10 (d) of HBP 2015–20 relating to third-party exports under EPCG Scheme

It has been clarified that Para 5.10(d) of HPB 2015–20 will be applicable to third party exports made on or after 1 April 2015 even in respect of exports made under EPCG authorizations issued prior to 1 April 2015. Third-party exports, which have been made prior to 1 April 2015, will be governed by the provisions of relevant policy/procedure.

Policy Circular No.3/2015-2020 dated 2 September 2015

42 Tax Digest

Public notices

DGFT notifies operationalization of modification of e-IECs and physical IECs from 1 September 2015

Henceforth, modification in Electronic IECs as well as physical IECs can only be done online.

Public Notice No. 36/2015-2020 dated 14 September 2015

DGFT amends Para 2.63(a) of HBP 2015–20

DGFT amends Para 2.63 (a) relating to temporary import/export of exhibits, which are freely importable/exportable for a period of six months on re-export/re-import basis. For such temporary import/export of exhibits without authorization, the condition of submitting of both bond/security to Customs and ATA Carnet have been replaced by either bond/security to Customs or ATA Carnet.

Public Notice No. 37/2015-2020 dated 21 September 2015

DGFT amends Note 1 of Appendix 3D as annexure to the Public Notice No.3/2015 dated 1 April 2015

Earlier under the SEIS, services and rates of reward were applicable for services export made from 1 April 2015 to 30 September 2015. This has been extended to 31 March 2016. Moreover, the list of services/rates will be subject to review w.e.f 1 April 2016.

Public Notice No. 42/2015-2020 dated 26 October 2015

DGFT amends Para 2.90 (d) of HBP 2015–20

Agencies desirous of enlistment in Appendix 2I of Appendices and Aayat Niryat forms will now submit their application to the DGFT instead of the concerned RA.

Public Notice No. 45/2015-2020 dated 9 November 2015

Central Excise

Implementing the provisions of Cigarettes and other Tobacco products (Prohibition of Advertisement and Regulations of Trade and Commerce, Production, Supply and Distribution) Act, 2003 and the Cigarettes and other Tobacco Products (Packaging and Labelling) Rules, 2008.

F.No. 221/09/2015-CX.6 dated 1 September 2015

Streamlining process of adjudication

F.No. 280/45/2015-CX.8A dated 17 September 2015

Excise duty exemption on bunker fuels used in ships/ vessels available subject to condition of:

(a) Carrying of containerized cargo namely, export-import cargo/empty containers/domestic cargo, between two or more Indian ports (including an intermediate foreign port),

(b) Filing of an import manifest/an export manifest, in each leg of voyage

Amends Notification No. 12/2012-CE dated 17 Mar 2012

Notification No 41/2015-CE dated 17 September 2015

Notifies conditions, safeguards and procedure for supply of tags, labels, printed bags, stickers, belts, buttons and hangers produced or manufactured in an EOU and cleared without payment of duty to DTA for exports in terms of Para 6.09 (g) of FTP 2015–20.

Notification No 19/2015-CE(NT) dated 18 September 2015

Clarification regarding binding nature of circular and instructions

Circular No 1006/13/2015-CX / F.No.96/90/2015-CX.1 dated 21 September 2015

‟Notifies conditions, safeguards and procedures for supply of items such as tags, labels, printed bags, stickers, belts, buttons and hangers produced or manufactured in an EOU and cleared without payment of duty to a DTA unit in terms of Para 6.09 (g) of Foreign Trade Policy, 2015–20, for the purpose of their exportation out of India.

Notification No 20/2015-CE(NT) dated 24 September 2015

Jurisdiction of the Settlement Commission (Customs, Central Excise & Service Tax) with respect to cases of gold smuggling

F.No. 275/46/2015-CX.8A dated 1 October 2015

43 Tax Digest

Withdrawal of Order under 37B of Central Excise Act, 1944 on classification of coconut oil packed in small containers

Circular No 1007/14/2015-CX / F.No. 103/01/2015-CX-3 dated 12 October 2015

Central Government exempts excise duty on RBD Palm Stearin/Methanol/ Sodium Methoxide used in manufacture of specified biodiesel subject to actual user condition.

Amends Notification No. 12/2012-CE dated 17 March 2012

Notification No 42/2015-CE dated 19 October 2015

Clarification regarding tower and blades constitute an essential component of wind operated electricity generators (WOEG)

The Finance Ministry clarifies that components used in WOEG, i.e., wind power generators such as towers, rotors and blades are exempted from Excise. This has been done with a bid to improve ease of doing business in India in the non-conventional energy sector and to reduce litigation arising from claims of tax exemptions.

Circular No 1008/15/2015-CX / F.No.201/08/2015-CX.6 dated 20 October 2015

Guidelines for launching of prosecution under the Central Excise Act, 1944 and Finance Act, 1994 released

CBEC has issued revised guidelines to launch prosecution in relation to offences punishable under Central Excise Act, 1944 and Finance Act, 1994. It has also issued revised guidelines for arrest and bail under Central Excise, Service tax.

These circulars supersede the earlier guidelines issued by the CBEC on initiating prosecution and amend the monetary limits for arrest as prescribed earlier.

Circular No 1009/16/2015-CX dated 23 October 2015

Circular No 1010/17/2015-CX dated 23 October 2015

Prescribes safeguards regarding self-sealing and self-examination of Bulk cargo

Amends Notification No. 42/2001-CE (NT)

Notification No 23/2015-CE (NT) dated 30 October 2015

Clarification regarding self-sealing and self-examination of Bulk cargo

Circular No 1011/18/2015-CX dated 30 October 2015

Prescribe the Basic Excise Duty (BED) with effect from 7 Jul 2015, on the following products at the rates indicated below:

1. Unbranded petrol from INR5.46 per liter to INR7.06 per liter;

2. Branded petrol from INR6.64 per liter to INR8.24 per liter;

3. Unbranded diesel from INR4.26 per liter to INR4.66 per liter; and

4. Branded diesel from INR6.62 per liter to INR7.02 per liter.

Amends Notification No. 12/2012-Central Excise, dated 17 March 2012

Notification No 43/2015-CE dated 6 November 2015

Provides excise duty exemption on all raw material and parts for use in manufacture of certain specified ships/vessels subject to actual user condition and also removes the requirement of manufacturing of ships/vessels in a custom bonded warehouse under the provisions of Section 65 of the Customs Act, 1962 for availing duty benefits.

Amendment to Notification No. 12/2012-CE dated 17 Mar 2012

Notification No 44/2015-CE dated 24 November 2015

Enables EOUs to become eligible for duty exemption on raw materials/parts consumed in manufacture of certain specified ships/vessels and cleared to DTA, even if such ships/vessels are exempt from basic customs duty and central excise/CV duty.

Amendment in Notification No. 22/2003-CE dated 31 Mar 2003

Notification No 45/2015-CE dated 24 November 2015

44 Tax Digest

CENVAT Credit

Amends CENVAT Credit Rules, 2004 to allow input credit of duty paid on molasses generated from cane crushed in the sugar season 2015–16, i.e., 1 October 2015 onward, used for producing ethanol for supply to the public sector oil marketing companies, namely, Indian Oil Corporation Ltd., Hindustan Petroleum Corporation Ltd. or Bharat Petroleum Corporation Ltd., for the purposes of blending with petrol, in terms of the provisions of S. No. 40A of the Table in notification No.12/2012-Central Excise, dated the 17 March 2012, by including such supplies of exempted ethanol under rule 6(6) of the CENVAT Credit Rules, 2004.

Notification No 20/2015-CE(NT) dated 24 September 2015

CENVAT Credit (Fifth Amendment) Rules, 2015

Education Cess (EC) and Secondary & Higher Education Cess (SHEC) was subsumed in Central Excise duty (with effect from 1 March 2015) and in Service tax (with effect from 1 June 2015).

Rule 3(7) of the CCR is amended in line with the Budget amendment, to allow the utilization of credit of EC and SHEC against the payment of Service tax on output service in the following cases:

• Credit of EC and SHEC paid on inputs/capital goods received by the service provider on or after 1 June 2015

Finance Ministry notifies CENVAT Credit (Fifth Amendment) Rules 2015 to allow output service provider to utilize credit of Education Cess (EC) and Secondary & Higher Education Cess (SHEC) paid on inputs and capital goods received in premises on or after 1 June 2015 toward payment of Service tax;

• Credit of balance 50% of EC and SHEC paid in respect of capital goods received in FY14–15

The credit of balance 50% of said cesses paid on capital goods received in the premises in FY14–15 can also be utilized for payment of output Service tax;

• Credit of EC and SHEC paid on input services, where the invoice, bill, challan or Service tax certificate for transportation of goods by rail, is received by the service provider on or after 1 June 2015

The input service in respect of which invoice/challan/bill/ST registration Certificate for Transportation of goods by rail, received by service provider on or after 1 June 2015. Accordingly, the service provider will be eligible to utilize such cesses’ credit toward output liability.

Notification No 22/2015 / F. No. 334/5/2015-TRU-CE (NT) dated 29 October 2015

Goods and Services Tax (GST)

Delineate role of GST Policy wing in CBEC and the GST Directorate.

Order No.5/Ad.IV/2015 / F. No. A 11013/18/2015.Ad.IV. dated 27 August 2015

Reports of Joint Committee constituted by Empowered Committee of State Finance Ministers on Business processes of payment, registration and refund under GST

The reports for Business Processes for GST to make suitable recommendations regarding registration, payment and refund processes under the GST regime released by the Finance Ministry.

These reports of the Joint Committee were put in the public domain on 6 October 2015.

These reports give details about the proposed changes as recommended by the Joint Committee and also prescribes forms for various procedures under GST. These reports had been released with a view to engage with the stakeholders and invite comments from the public at large. Comments/feedback on the draft Business reports could have been submitted through the MyGov.in portal by 31 October 2015.

Report of the Joint Committee constituted by Empowered Committee of State Finance Ministers on business processes for return under GST

The report elucidates salient aspects pertaining to filing of GST returns, which includes taxpayer’s obligations, periodicity, process involved in filing etc.

45 Tax Digest

The report on GST return was put in the public domain on 20 October 2015.

The format of return to be filed by various taxpayers has been provided as annexures. Separate returns have been prescribed among others for outward supplies, inward supplies and a consolidated return based on the two returns. The report has been released with a view to engage with the stakeholders and to invite comments from the public at large. Comments/feedback on the draft business reports could have been submitted through the “MyGov.in” portal by 6 November 2015.

Service tax

Circular regarding levy of Service tax on services provided by Goods Transport Agency (GTA)

CBEC clarifies that ancillary services such as loading/unloading, packing/unpacking, transshipment, temporary storage etc., are not provided as independent activities but are the measures for successful provision of the principal service of transportation of goods by road. It should be treated as a single composite service based on the main service. Therefore, an abatement of 70% applicable to GTA service, will also be available to the ancillary services. It also clarified that in cases where the GTAs undertake to deliver goods within a stipulated time, the same will be considered as services of GTA in relation to transportation of goods and would therefore, be eligible for the abatement of 70%.

Circular No. 186/5/2015-ST dated 5 October 2015

Notification on taxability of services provided in relation to remittance of money to India from overseas

CBEC grants Service tax exemption to the Indian Bank or other entity acting as an agent to money transfer service operators in relation to remittance of foreign currency into India for the period commencing from 1 July 2012 to 13 October 2014. This exemption is granted by exercising the powers under section 11C of the Central Excise Act, 1944, which is made applicable to service tax vide section 83 of the Finance Act, 1994.

Notification No. 19/2015-ST dated 14 October 2015

Ministry of Finance exempts banking facilitation services under ”Pradhan Mantri Jan Dhan Yojana”

The Central Government extends service tax exemption to services provided by business facilitator/business correspondent to a banking company with respect to a basic savings bank deposit accounts covered by Pradhan Mantri Jan Dhan Yojana in banking company’s rural area branch by way of account opening, cash deposits, cash withdrawals, obtaining e-life certificate and Aadhar seeding. The services provided by any person as intermediary to a business facilitator/business correspondent with respect to the above-mentioned services and the business facilitator/business correspondent to an insurance company in a rural area have also been exempted from service tax.

Further it defines “Basic Savings Bank Deposit Account” as opened under guidelines issued by the Reserve Bank of India. Lastly, it also exempts charitable activities relating to advancement of yoga in addition to religion and spirituality.

Notification No. 20/2015-ST dated 21 October 2015

Notification on Swachh Bharat Cess

Ministry of Finance notified that Swachh Bharat Cess (SBC) will be levied at the rate of 0.5% on the value of taxable services with effect from 15 November 2015 for the purpose of financing and promoting Swachh Bharat initiatives or for any other purpose relating thereto.

Notification No. 21/2015-ST and 22/2015-ST dated 6 November 2015

CBEC formulates a scheme on speedy disbursal of pending refund claims of exporters of services under Rule 5 of the CENVAT Credit Rules, 2004

This scheme will be applicable to all refund claims, which are pending as on 31 March 2015 and have not been disposed of by way of sanction order. However, it does not cover the claims, which are remanded back to the original sanctioning authority. A provisional payment of 80% of the

46 Tax Digest

claimed amount will be made within five working days on submission of requisite certificate and undertaking by the claimant. The payment made is purely provisional, which will be subject to verification and issuance of show cause notice.

Circular No. 187/6/2015-ST dated 10 November 2015

Notification specifying that Swachh Bharat Cess (SBC) will be calculated on abated value

CBEC by amending Notification No 22/2015 dated 6 November 2015 clarifies that SBC will be leviable only on percentage of taxable value in case of services specified in Notification No. 26/2012-ST dated 20 June 2012. Furthermore, it clarifies that value of service for the purposes of SBC will be the value as determined in accordance with the Service Tax (Determination of Value) Rules, 2006.

Notification No. 23/2015-ST dated 12 November 2015

Notification specifying applicability of SBC under reverse charge mechanism

CBEC seeks to provide that provisions of Notification No 30/2012 - ST dated 20 June 2012 (specifying services covered under reverse charge mechanism) will be applicable for the purpose of SBC.

Notification No. 24/2015-ST dated 12 November 2015

Notification specifying alternate tax rate for SBC as applicable to Service tax under sub-rules 7,7A,7B,7C of rule 6 of Service Tax Rules 1994

CBEC plans to amend Service Tax Rules, 1994 with regard to levy of tax at alternate rates in respect of services provided by air travel agents, life insurance services, purchase or sale of foreign currency, distributor or selling agent of lottery ticket. SBC in such cases will be calculated as: Alternate Tax Rate * 0.5/14

Notification No. 25/2015-ST dated 12 November 2015

Circular regarding Accounting code for payment of Swachh Bharat Cess

Central Government allocates accounting codes for Swachh

Bharat Cess. Minor head for the said Cess will be “0044-00-506”, while sub-heads for purpose of tax collection, interest penalties and refunds will be “00441493”, “00441494”, “00441496” and “00441495” respectively.

Circular No. 188/7/2015-ST dated 16 November 2015

VAT

Andhra Pradesh

• Government departments and end consumers are not required to furnish e-way bill and transport declaration in case of interstate transactions. Proper invoice and certificate from authorized official are sufficient documentary evidences.

Circular No. CCTs Ref No.AI(1)/45/2014, dated 14 October 2015

Chhattisgarh

• Due date for completion of pending assessment proceedings, has been extended to 30 June 2016 as compared to 31 December 2015.

Notification No. F 10-36/2015/CT/05 (64), dated 30 September 2015

Delhi

• Government issues corrigendum to Circular No. 23 of 2015–16, which prescribes security for various dealers under the Delhi Value Added Tax (DVAT) Act. Accordingly, dealers who are not paying tax under Section 16 of the DVAT Act will be liable to security @ 0.1% of taxable turnover (excluding exempted goods sale, high sea sale, sale to SEZ) in terms of Sec 25 of the Act.

Circular F.3(566) /Policy/VAT /2015/Pt File/ 660-66 dated 9 October 2015

• All dealers need to submit information in Form DP-1 online latest by 31 December 2015. The form will be filled by dealers registered up to 31 October 2015.

Notification No. No.F.3(352)Policy/VAT/2013/1062-73 dated 23 November 2015

47 Tax Digest

Himachal Pradesh

• All dealers except dealers paying lump sum tax by way of composition are required to compulsorily pay tax electronically with effect from 1 October 2015.

Notification No. EXN-F(10)-7/2011 dated 16 September 2015

Karnataka

• The time for revision option under e-UPaSS (electronic Uploading of Purchase and Sales Statements) module for the tax periods May 2014 to May 2015 has been extended up to 31 December 2015.

Circular No. 14 / 2015/16 No. CCW/CR-44/2013-14 Dated 19 October 2015

Kerala

• All multi-level marketing companies, their distributors and agents are liable to take registration and pay tax irrespective of their turnover. The Department has also issued guidelines for functioning of multi-level marketing entities.

Circular No. 26/2015, C3/35960/12/CT, dated 11 November 2015

Maharashtra

• Refund under MVAT Act, 2002 by way of National Electronic Funds Transfer (NEFT)

The Maharashtra Government specified that refund, if any, due under the MVAT Act, 2002 to the registered dealer, will be credited to his account by way of NEFT, with effect from 1 October 2015.

Notification no. VAT-1515/CR 100/Taxation dated 18 September 2015

• Modus operandi for NEFT refunds

Pursuant to the Notification granting VAT refund through NEFT w.e.f. 1 October 2015, the Maharashtra Government issued a clarification on the modus

operandi therein. In order to avail this facility, the eligible registered dealers are required to comply with the following necessities:

1. Dealer must have his bank account in a bank, which facilitates NEFT

2. Dealer is required to include the information about the NEFT-enabled bank account, i.e., bank account number, branch details, IFSC code in the Registration Record. For this purpose, the dealers are required to submit an amendment application to the concerned Registration Branch/Officer, along with Annexure A duly attested by the Branch Manager and the cancelled cheque of the bank in which he desires to have remittance of his refund through NEFT.

3. Refund under NEFT will be subject to provisions of MVAT Act, 2002 and the rules made thereunder and any amount if wrongly refunded shall be recovered as per provisions thereto.

Refund under NEFT mode will apply where the refund proposal is processed on or after 1 October 2015. However, refund in respect of dealers (a) whose registration certificate is cancelled; (b) who is non-TIN holder and (c) where orders are not passed on MAHAVIKAS, will be continued to be granted manually, as per the pre-existing system.

Trade Circular no. 14T of 2015 dated 30 September 2015

• Amendment in Rule 88 of the Maharashtra Value Added Tax Rules, 2005 (MVAT Rules)

The Maharashtra Value Added Tax (Second Amendment) Rules, 2005 will be effective from 1 December 2015. It seeks to substitute Rule 88(1) of the MVAT Rules.

48 Tax Digest

According to the amendment, rates of interest for the purposes of sub-sections (1), (2) and (3) of Section 30 are as follows:

Sr. No. Period Rate of interest

1 Up to 1 month

1.25% of the amount of such tax for the month or part thereof

2 Up to 3 months

1.25% of the amount of such tax for the month or part thereof for the first month of delay and 1.5% for each month or part thereof for delay beyond 1 month and up to 3 months

3 More than 3 months

1.25% of the amount of such tax for the month or part thereof for the first month of delay and 1.5% for each month or part thereof for delay beyond 1 month and up to 3 months and 2% for each month or part thereof for delay beyond 3 months

Rajasthan

• Exemption from payment of tax on works contracts executed in SEZ is extended up to 31 March 2016; however, for SEZ established in backward areas as specified by the State Government, exemption period remains the same, i.e, up to 23 August 2017.

Notification No. F.12(43)FD/Tax/05-Pt-88 dated 24 September 2015

Tamil Nadu

• Tamil Nadu Authority and Clarification for Advance Ruling clarifies that “Mobile Phone Batteries” are liable to tax at 14.5% according to entry in Sr No 9 of Part- C of First Schedule to Tamil Nadu Value Added Tax Act, 2006.

Clarification ACAAR No 37/2015-16 dated 21 September 2015

49 Tax Digest

Regulatory1. Foreign investment allowed in Real Estate Investment Trust (REIT), Infrastructure Investment Trust (InVit), Alternative Investment Funds (AIF)

The RBI has permitted foreign investment into investment vehicles such as Real Estate Investment Trusts (REITs), Infrastructure Investments Trust (InvIts) and Alternative Investment Funds (AIFs) under the automatic route. For this purpose, the Foreign Exchange Management (Transfer or Issue of Security by a person resident outside India) Regulations, 2000 (“FDI regulations”) have been amended, to define, inter-alia, the term “unit” as “beneficial interest of an investor in the investment vehicle, which will include shares or partnership interests”.

The RBI has also defined “ownership and control” of the fund on the same lines as defined for other entities under the FDI regulations and it is clarified that downstream investment by an investment vehicle will be regarded as foreign investment only if neither the sponsor nor the manager nor the investment manager is Indian “owned and controlled”.

Source: Notification No. FEMA 355/ 2015-RB dated 16 November 2015

2. Amendment in the definition of the term “real estate business” to exclude REITs

Consequent upon announcement of relaxation on allowing “Foreign investment in REIT”, the RBI has amended the definition of the term “real estate business” as provided under the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 (“CAT regulations”), which is referred across various regulations under FEMA. The said term now excludes “development of townships, construction of residential/commercial premises, roads or bridges and REITs registered and regulated under the SEBI (REITs) Regulations 2014”.

Source: Notification No. FEMA 345/2015-RB dated 16 November 2015

Foreign Exchange Management Act (FEMA) 1999

50 Tax Digest

Foreign Direct Investment Policy (FDI policy)

Department of Industrial Policy and Promotion (DIPP)

1. Liberalization in FDI policy in various sectors by DIPP

DIPP has liberalized FDI policy in 15 sectors vide Press Note 12 (2015 series). The key changes in various sectors are as follows:

(a) Construction development sector

• Minimum area and investment conditions in construction sector removed;

• Each phase of FDI-funded construction development project to be considered as separate;

• Foreign investor permitted to exit and repatriate foreign investment before completion of project under automatic route subject to a lock-in-period of three years (now calculated with reference to each tranche of foreign investment);

• Transfer of stake from one non-resident (NR) to another NR permitted (without repatriation of investment) under automatic route without any lock-in period;

• Earning of rent/income on lease of the property, not amounting to transfer, not to be considered as real estate business. For this purpose “transfer” has been defined in the said press note;

• Condition of lock-in period will not apply to hotels and tourist resorts, hospitals, Special Economic Zones (SEZs), educational institutions, old age homes and investment by NRIs;

• 100% FDI under the automatic route is permitted in completed projects for operation and management of townships, malls/shopping complexes and business centers. Consequent to foreign investment, transfer of ownership and/or control of the investee company from residents to NR also permitted subject to a lock-in-period of three years, and transfer of immovable property or part thereof is not permitted during this period;

(b) Wholesale/cash & carry trading and single brand retail trading (SBRT)

• The Government of India (GoI) has permitted a single entity to undertake both the activities of SBRT and wholesale/cash & carry trading. Such entity is mandatorily required to maintain separate books of accounts for these two separate arms of business. Moreover, the FDI policy needs to be compiled for both the arms of business.

SBRT

• SBRT companies operating through brick and mortar stores, permitted to undertake retail trading through e-commerce mode as well without GoI approval;

• Sourcing condition of procurement of 30% of the value of goods to be considered from the date of opening of first store instead of the date of receipt of first tranche of FDI;

• Sourcing clause permitted to be dropped with the approval of Foreign Investment Promotion Board (“FIPB”) for entities engaged in trading of goods involving “state of art” and “cutting edge technology”;

• Conditions for products to be sold under the same brand internationally and investment by NR entity/entities as the brand owner or under legally tenable agreement with the brand owner, will not apply for undertaking SBRT of Indian brands;

• Indian manufacturer permitted to sell its own branded products in any manner, i.e., wholesale, retail, including through e-commerce platforms. For the purposes of FDI policy, Indian manufacturer will be the investee company, which is the owner of the Indian brand and which manufactures in India, in terms of value, at least 70% of its products in-house, and sources, a maximum of 30% from Indian manufacturers. Furthermore, Indian brands need to be owned and controlled by resident Indian citizens and/or companies, which are owned and controlled by resident Indian citizens.

51 Tax Digest

(c) Limited Liability Partnership (LLPs)

• FDI in LLPs permitted under the automatic route (100%) in sectors where 100% FDI is allowed under automatic route without any FDI-linked performance conditions;

• LLPs with FDI are allowed to make downstream investment subject to the condition that downstream company/LLP operates in a sector where 100% FDI is allowed under automatic route. Compliance norms similar to those applicable to Indian companies making downstream investment made applicable to LLPs as well;

• Criteria in respect of “ownership and control” of LLPs have also been defined on similar lines as defined for Indian companies;

• FDI in LLP is made subject to the compliance of the conditions of LLP Act, 2008 and all other remaining restrictive conditions have now been removed;

(d) Defense sector

• Foreign investment (including Portfolio investment and investment by Foreign Venture Capital Investments (FVCIs)) up to 49% permitted under the automatic route;

• Proposals for foreign investment in excess of 49% to be considered under the approval route by FIPB on a case-to-case basis, wherever it is likely to result in access to modern and “state-of-art” technology in the country;

• In case of infusion of fresh foreign investment within the permitted automatic route level, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, FIPB approval is required.

(e) Private banking sector

• Foreign Institutional Investors (FIIs)/Foreign Portfolio Investors (FPIs)/Qualified Foreign Investors (QFIs), are permitted to invest up to a sectoral limit of 74% in private sector banks, subject to no change of control and management of the investee company.

(f) Broadcasting sector

• FDI enhanced from 74% to 100% in teleports, direct to home (DTH), Mobile TV, headend-in-the sky broadcasting services (HITS). In cable networks, the limit has been increased from existing 49% to 100%. For the above, FDI up to 49% is permitted under the automatic route and beyond 49% needs FIPB approval;

• FDI enhanced from 26% to 49% in Terrestrial Broadcasting FM and up-linking of news and current affairs TV channels under approval route;

• FDI up to 100% permitted in uplinking of non-news and current affairs TV channels/down-linking of TV channels under automatic route;

• The companies engaged in information and broadcasting sector, where sectoral cap is up to 49%, would need to be owned and controlled by resident Indian citizens and Indian companies (which are owned and controlled by resident Indian citizens).

(g) Agriculture and plantation sector

• FDI up to 100% permitted now in coffee plantation, rubber plantation, cardamom, palm oil tree, olive oil tree plantations under the automatic route including tea plantations.

(h) Transportation

• FDI permitted in non-scheduled air transport service and Ground Handling Services under the automatic route increased from 74% to 100%;

• FDI up to 49% (100% for NRIs) has been permitted in regional air transport service under the automatic route.

(i) Manufacturing

• Insertion of definition of the term “manufacture” in the extant FDI Policy similar to the definition provided under Section 2(29BA) of the Income Tax Act, 1961;

• Manufacturers are now permitted to sell their products manufactured in India through wholesale and/or retail, including through e-commerce without GoI/FIPB approval.

52 Tax Digest

(j) Other key changes

• FIPB approval not required for swap of shares for the investment in automatic route sectors;

• Investments by companies, trusts and partnership firms, which are incorporated outside India and are owned and controlled by NRIs, will be deemed to be treated as domestic investments at par with the investments made by residents subject to the condition that investment is under non-repatriation route;

• FIPB approval will not be required, for infusion of foreign investment into dormant companies;

• Increase in the pecuniary limit for cases to be considered by FIPB from INR30 billion to INR50 billion and proposals beyond INR50 billion will be considered by Cabinet Committee on Economic Affairs (CCEA);

• FDI up to 100% permitted under the automatic route in duty free shops located and operated in the customs bonded areas;

• FDI cap enhanced from 74% to 100% in establishment and operation of satellites under the government route;

• FDI cap enhanced from 74% to 100% in credit information companies under the automatic route;

• The term “internal accruals” has been defined for the purposes of downstream investment to mean “profits transferred to reserve account after payment of taxes”.

Source: Press Note 12 of 2015 Series issued by DIPP as on 24 November 20152. 100% automatic route in White Label ATMs (WLA) operations

DIPP has permitted FDI up to 100% under the automatic route in WLA operations, which was earlier allowed under approval route. This is subject to the following conditions:

• Any non-bank entity intending to set up WLAs should have a minimum net worth of INR1 billion according to

the latest financial year’s audited balance sheet, which is to be maintained at all times;

• In case the entity is also engaged in any other 18 non-banking finance companies (NBFC) activities, then the foreign investment in the company setting up WLA, will also have to comply with minimum capitalization norms for foreign investments in NBFC activities, as provided under the Consolidated FDI Policy Circular 2015;

• FDI will be subject to specific criteria and guidelines issued by the RBI for a non-bank entity seeking authorization under the Payment and Settlement Systems, to set up, own and operate WLAs

Source: Press Note 11 of 2015 dated 1 October 2015

3. Increase in initial validity of industrial license for defense sector

DIPP has issued Press Note 10 of 2015 wherein they have increased the initial validity of industrial license for the defense sector from existing period of 7 years to 15 years. The license is extendable up to 18 years, for all existing as well as future licenses.

Source: Press Note 10 of 2015 Series issued by DIPP as on 22 September 2015

4. Issuance of partly paid up shares and warrants

DIPP has issued Press note 9 (2015 series) with its intent of aligning the norms toward issuance of partly-paid up shares and warrants to NRs with the exchange control regulations.

RBI vide A.P.(DIR Series) Circular No. 3 dated 14 July 2014 had provided that Indian company whose activity/sector falls under government route will only require prior approval of the FIPB for issue of partly-paid shares/warrants.

However, the FDI Policy, even after the issue of the above RBI circular, continued to state that warrants and partly paid shares can be issued to person(s) resident outside India only after approval through the Government route irrespective of the activity/sector falls under the automatic or Government route.

DIPP has decided to allow partly paid shares and warrants as eligible capital instruments for the purposes of FDI

53 Tax Digest

policy vide Press Note 9 (2015 series). Therefore, ambiguity on the requirement of obtaining approval from FIPB on issuance of the partly paid up equity shares/warrants to NRs has been removed.

The said Press Note, in addition to removing the anomaly, also clarifies that only partly paid equity shares can be issued and hence, partly paid preference shares/debentures cannot be issued.

Source: Press Note 9 of 2015 Series issued by DIPP as on 15 September 2015

Reserve Bank of India (RBI)

1. Major liberalization in ECB policy

In view of the macro-economic developments and the experience gained in administering ECB regime over a decade, the RBI has announced the liberalized ECB regime on 30 November 2015 to be effective from the date of publication in the Official Gazette. The overarching principles of the revised framework are:

• A more liberal approach, with reduced number of restrictions on end uses, increased all-in-cost ceiling, etc., for long-term foreign currency borrowings as the extended term makes repayments more sustainable and minimizes roll-over risks for the borrower;

• Similarly, a more liberal approach for Indian Rupee (INR) denominated ECBs, where the currency risk is borne by the lender;

• Expansion of the list of overseas lenders to include long-term lenders such as sovereign wealth funds, pension funds, insurance companies;

• Only a small negative list of end-use requirements applicable to long-term ECBs & INR denominated ECBs;

• Raising of limit for small value ECBs with Minimum Average Maturity (MAM) of three years to US$50 million from the existing limit of US$20 million; and

• Alignment of the list of infrastructure entities eligible for ECB with the harmonized list of the Government of India.

For simplification, the revised ECB framework has been

divided into following three tracks and the parameters of ECB (e.g., minimum average maturity period, eligible borrowers, recognized lenders, all-in-cost, end uses etc.) are mentioned according to these respective tracks:

Track I Medium-term foreign currency denominated ECB with Minimum Average Maturity (MAM) of 3/5 years.

Track II Long-term foreign currency denominated ECB with MAM of 10 years.

Track III Indian Rupee denominated ECB with MAM of 3/5 years.

It is also important to note that entities raising ECB under old policy can raise the said loans by 31 March 2016 provided the agreement in respect of the loan is already signed by the date the new framework comes into effect. However, to raise ECB under the under-mentioned carve outs, the borrowers will have time up to 31 March 2016 to sign the loan agreement and obtain the Loan Registration Number (LRN) from the RBI:

1. ECB facility for working capital by airlines companies;

2. ECB facility for consistent foreign exchange earners under the US$10 billion scheme; and

3. ECB facility for low-cost affordable housing projects

These guidelines will be reviewed after one year based on the experience and evolving macro-economic situation.

Source: A.P. (DIR Series) Circular No.32 dated November 30, 2015 released by RBI to be effective from the date of publication in the Official Gazette.

2. RBI revised the list of compliances to be submitted by NBFCs

The RBI has rationalized the returns required to be submitted by NBFCs by changing the periodicity of Form NDSI-500cr and ALM-1 pertaining to NBFCs with asset size of more than INR5 billion (not accepting/holding public deposits) and asset liability management respectively. The filing of the aforementioned forms has changed from monthly to quarterly to be submitted online through COSMOS. In addition to this, Form NBS-6 has been discontinued as it provided the same information as in Form ALM-1.

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Source: DNBS (PD).Circular No.03 dated 26 November 2015

3. No fresh permission/renewal granted to foreign law firms by the RBI for opening of Liaison office (LO)

The RBI has decided not to grant any permission to any foreign law firm for opening LO in India as directed by Hon’ble Supreme Court (SC) in the case of Bar Council of India v. A.K. Balaji & ors. However, foreign law firms, which have been granted permission prior to the date of the order in the aforementioned case for opening LOs in India may be allowed to continue provided such permission is still in force.

Therefore, no fresh permission/renewal of permission will be granted by RBI/Authorized dealer (AD) banks, respectively till the policy is reviewed based on the SC judgment.

Source: A.P. (DIR Series) Circular No. 23 dated 29 October 2015

4. RBI increased limit for investments by FPI in Government securities

In order to provide more predictable regime, medium-term framework (MTF) was announced in Fourth Bi- monthly Monetary Policy Statement for the year 2015–16 as on 29 September 2015. The limits for investment by FPIs in Government securities were last increased to US$30 billion vide A.P.(DIR Series) Circular No. 111 dated 12 June 2013. The RBI has enhanced limit for investment by FPIs in GoI securities as follows:

• The limits for FPI investment in debt securities will henceforth, be announced/fixed in Rupee terms.

• The limits for FPI investment in the GoI securities will be increased in phases to reach 5% of the outstanding stock by March 2018. In aggregate terms, this is expected to open up room for additional investment of INR1,200 billion in the limit for GoI securities by March 2018 over and above the existing limit of INR1,535 billion for all GoI securities.

• Additionally, there will be a separate limit for investment by all FPIs in the State Development Loans (SDLs), to be increased in phases to reach 2% of the

outstanding stock by March 2018. This will amount to an additional limit of about INR500 billion by March 2018.

• The effective increase in limits for the following two quarters will be announced every half year in March and September.

• The existing requirement of investments being made in GoI securities (including SDLs) with a minimum residual maturity of three years will continue to apply to all categories of FPIs.

• Aggregate FPI investments in any GoI security will be capped at 20% of the outstanding stock of the security. Investments at existing levels in securities over this limit may continue but not get replenished through fresh purchases by FPIs till these falls below 20%.

It has been decided to enhance the limit for the same in two tranches from 12 October 2015 and 01 January 2016 as directed by the RBI in its below mentioned circular.

Source: A.P. (DIR Series) Circular No. 19 dated 6 October 2015

5. NRIs may subscribe to National Pension System through normal banking channels

The RBI has amended its regulation to allow NRIs to subscribe to the National Pension System, governed and administered by Pension Fund Regulatory and Development Authority (PFRDA). This is subject to such subscriptions being made through normal banking channels or out of funds held in his/her Non-Resident External (NRE)/Non-Resident Ordinary (NRO)/Foreign Currency Non-resident (FCNR) account and that the person should be eligible to invest according to the provisions of PFRDA. The annuity/accumulated savings out of such investments will be repatriable.

Source: Notification No. FEMA 353/2015 RB dated 6 October 2015

6. Submission of “Annual return on foreign liabilities and assets” by LLPs

The RBI has amended its regulations to include the requirement of filing “Annual Return on Foreign Liabilities and Assets” by LLPs, which have received FDI in previous

55 Tax Digest

year(s) including the current year on or before July 15th of each year.

Source: Notification No. FEMA 351/2015 RB dated 30 September 2015

7. RBI issues framework for issuance of rupee-denominated bonds overseas

The RBI has, in order to boost investment in the economy and to provide additional source of funding, allowed any corporate or body corporate to raise funds from the overseas market in rupee denominated bonds. The broad contours of the said framework are listed out as below:

• Eligible borrowers: Any corporate or body corporate (including REITs and InVits), which comes under regulatory jurisdiction of SEBI) is eligible to issue rupee-denominated bonds overseas;

• Type of instrument: Only plain vanilla bonds issued in Financial Action Task Force (FATF) compliant financial centers (either placed privately or listed on exchanges according to host country regulations).

• Recognized investor: All investors from a FATF compliant jurisdiction; however, banks incorporated in India will not have access to these bonds in any manner. They can act as arranger and underwriter.

• Minimum maturity period: Minimum maturity period of five years; no call and put option will be exercisable prior to completion of minimum maturity.

• All-in-cost: All-in-cost should be commensurate with the prevailing market conditions.

• End uses: The proceeds so generated can be used for all purposes except for the following:

• Real estate activities other than for development of integrated township/affordable housing projects;

• Investing in the capital market;

• Activities prohibited according to FDI guidelines such as manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes;

• On-lending to other entities for any of the

above activities; and

• Purchase of land.

• Amount: Companies can raise up to US$750 million per annum under the automatic route. Prior approval from the RBI will be required beyond the said limit.

• Conversion Rate: Rupee conversion will be at market rate on the date of settlement for the purpose of transaction undertaken for issue and servicing of such bonds.

• Hedging: Overseas investors will be eligible to hedge their exposures in Rupee through permitted derivative products with AD banks in India.

Source: A.P. (DIR Series) Circular No. 17 dated September 29, 2015

8. Enactment of Foreign Exchange Management (Regularization of assets held abroad by a person resident in India) Regulations, 2015 by RBI

The GoI has enacted The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (Black Money Act) on 26 May 2015 to address the issue of undisclosed assets held abroad. In order to give the taxpayers an opportunity to voluntarily come clean, the Act provides for a one-time compliance window scheme. By opting to make a declaration of their undisclosed overseas assets under this Scheme, the taxpayers enjoy immunity from prosecution under this Act as well as other specified Acts, including FEMA. However, there was no clarity on the implications that may have arisen under FEMA upon such regularization of overseas assets. The RBI has therefore, addressed this apprehension of taxpayers by enacting Foreign Exchange Management (Regularization of assets held abroad by a person resident in India) Regulations, 2015.

In terms of the said regulations, the RBI has clarified that:

• No proceedings will lie under FEMA against the taxpayer with respect to an asset held abroad for which taxes and penalties under the provisions of Black Money Act have been paid;

56 Tax Digest

• No permission required under FEMA to dispose of the undisclosed overseas asset so declared and bring back the proceeds to India through banking channels within 180 days from the date of declaration;

• Where the taxpayer desires to hold the declared overseas asset, the taxpayer is required to apply to the RBI within 180 days from the date of declaration if such permission is necessary as on date of application; the RBI is required to deal with such applications according to existing regulations; and

• Where such permission is not granted, the overseas asset will have to be disposed of within 180 days from the date of receipt of communication from the RBI conveying refusal of permission and proceeds should be brought back to India immediately through the banking channel

Source: Notification No. FEMA 348/2015-RB dated 25 September 2015

9. Opening of foreign currency accounts in India by ship manning/crew management agencies

The RBI has granted general permission to ship-manning/crew managing agencies rendering services to shipping/airline companies incorporated outside India to meet local expenses and to open/hold/maintain non-interest bearing foreign exchange account with AD bank for meeting local expenses.

Furthermore, the RBI has reproduced the guidelines on the operations of the foreign currency accounts opened with AD bank by foreign shipping/airline companies or their agents with marginal modification. The key highlights of the guidelines are reproduced below for easy reference:

• Credits to such foreign currency accounts will only be by way of freight or passage fare collections in India or inward remittances through normal banking channels from the overseas principal;

• Debits will be toward various local expenses in connection with the management of the ships and crew in the ordinary course of business;

• No credit facility (fund/non-fund based) should be granted against security of funds held in such

accounts;

• The bank should meet the prescribed “reserve requirements” in respect of balances in such accounts;

• No Exchange Earner’s Foreign Currency (EEFC) facility should be allowed in respect of the remittances received; and

• Accounts to be maintained only until the validity period of the agreement

Source: A.P. (DIR series) Circular No. 15 dated 24 September 2015

10. Consolidated guidelines on settlement of import- and export-related payments facilitated by Online Payment Gateway Service Providers (OPGSP)

Currently, AD banks are permitted to offer the facility to repatriate export-related remittances by entering into standing arrangements with OPGSPs. The RBI has now, in order to facilitate e-commerce, permitted the AD banks to offer similar facility to repatriate import-related remittances by entering standing arrangements with OPGSPs. The RBI has issued the revised consolidated guidelines on such imports and exports.

For operationalizing such arrangements, AD banks will:

• Carry out the due diligence of the OPGSP;

• Maintain separate Export & Import collection accounts in India for each OPGSP;

• Satisfy themselves as to the bonafides of the transactions and ensure that related purpose codes reported to the RBI are appropriate;

• Submit all the relevant information to RBI, as and when advised to do so; and

• Conduct reconciliation and audit of the collection accounts on a quarterly basis.

Furthermore, foreign entities desirous of opening as OPGSP, will open an LO in India with prior approval of the RBI. It will be obligatory upon OPGSP to:

• Ensure adherence to Information Technology Act,

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2000 and all other relevant laws;

• Mechanism for resolution of disputes and redressal of complaints; and

• Create reserve fund according to its return and refund policy;

In addition to this, detailed guidelines have been issued in relation to import and export transactions and below-mentioned source can be referred in this respect.

Source: A.P. (DIR series) Circular No. 16 dated 24 September 2015

58 Tax Digest

Click on the links provided below to access some of our recently published articles.

In the pressRetrospective tax still a concern for foreign investorsJohn Hobster, Business Standard

Phase out of incentives in line with DTC agendaSatya Poddar, Business Standard

Break free of the legacy mindsetSatya Poddar, Business Standard

This festive season - physical or paper gold? Amarpal Chadha and Rama Karmakar, ET Online

Tax avoidance, a global scourgeHasina Chhil, Hindu Business Line

India tax in a post-BEPS worldJayesh Sanghvi, ET Online

Is India ready for BEPS?Jayesh Sanghvi, The Financial Express

Unilateral, bilateral, multilateral: winds of change post-BEPSRajendra Nayak, ET Online

Delay in housing projects to have repercussionsPramod Achuthan, The Financial Express

MAT under debateSubramaniam Krishnan, CNBC - The Firm

MAT put to rest – temporary relief for FPIsSameer Gupta, ET Online

Breaking the GST impasseSatya Poddar, The Financial Express

59 Tax Digest

Direct Tax

Compilation of Tax Alerts

Sl. No. Title Date of the alert Citation/Notification/Circular

1 A.P. Shah Committee Report on non-applicability of MAT to FIIs/FPIs

2 September 2015 Report submitted by three member committee headed by Justice (Retd.) A. P. Shah on 15 Aug 2015

2 Black Money: CBDT releases further set of clarifications by way of FAQs on disclosure of undisclosed overseas assets under one-time compliance window

4 September 2015 Circular No.15 of 2015 dated 3 September 2015

3 Delhi HC rules no disallowance of interest expenditure absent exempt dividend income received during tax year

8 September 2015 Cheminvest Ltd. v. CIT

[TS-504-HC-2015 (Del)]

4 Government clarifies non-applicability of MAT to foreign companies in the absence of place of business in India

25 September 2015

Press Information Bureau release dt. 24 September 2015

5 Ahmedabad Tribunal upholds salary taxation net of refund of excess salary of past years

28 September 2015

Vrajeshwari B Parikh v. ITO

[TS-533-ITAT-2015(Ahd)]

6 CBDT simplifies procedure for furnishing NIL withholding declarations

1 October 2015 CBDT Notification No. 76/2015/F. No.133/50/2015-TPL dated 29 September 2015

7 Karnataka HC rules on availability of foreign tax credit relief where the income is exempt from Indian taxes under income-linked incentive scheme

7 October 2015 Wipro Ltd. v. DCIT

[TS-565-HC-2015(KAR)]

8 Publication of OECD final reports - implications for banks in Asia Pacific

14 October 2015 Key issues arising from the reports that are most relevant for banks in Asia-Pacific in this context.

9 Rajkot Tribunal grants India-Singapore DTAA benefits to freight income received in the UK; on facts, limitation of relief article not applicable

15 October 2015 Alabra Shipping Pte Ltd. v. ITO

[TS-588-ITAT-2015]

10 Indian tax administration issues revised and updated guidance on transfer pricing audit procedures

20 October 2015 CBDT Instruction No.15 of 2015 on 16 October 2015 to provide guidance to AOs in selecting cases for transfer pricing audits in relation to international transactions

11 Supreme Court rules on allowability of depreciation on trademarks, copyright and technical know-how considering the same as “plant”

20 October 2015 Mangalore Ganesh Beedi Works v. CIT

[TS-595-SC-2015]

60 Tax Digest

Sl. No. Title Date of the alert Citation/Notification/Circular

12 Indian Tax Administration amends transfer pricing rules regarding use of multiple year data and arm’s length range

26 October 2015 CBDT amendments to the Indian transfer pricing rules by notification no 83/ 2015 dated 19 October 2015.

13 Karnataka High Court rules procurement activity carried out by a liaison office in India is not taxable

26 October 2015 Columbia Sportswear Company v. DIT [TS-600-HC-2015(KAR)]

14 CBDT issues a Press Release clarifying concessional tax rate of 5% on rupee denominated bonds for nonresidents

2 November 2015 CBDT Press Release dated 29 October 2015

15 India looks to implement anti-BEPS measures 5 November 2015 The deliberations of the roundtable meeting on BEPS

16 HR and Tax Alert : OECD final reports on BEPS require rigor around documentation and structure supporting cross-border employment activity

24 November 2015 OECD final reports on BEPS

17 Supreme Court upholds borrowing cost deduction on onward lending to subsidiary on interest-free basis out of business expediency

1 December 2015 Hero Cycles (P) Ltd. v. Commissioner of Income Tax

[TS-670-SC-2015]

Please note that links to the alerts on OECD’s final reports on each of the 15 Actions are separately given under the topic “OECD BEPS updates” in Page 24.

61 Tax Digest

Indirect Tax

Sl. No. Title Date of the alert Citation/Notification/Circular

1 Bombay High Court rules that creation of an Indian brand necessary for availing benefits under “Served from India scheme”

10 September 2015 Bombay High Court dealing with a bunch of writ petitions in respect of the eligibility of Duty Credit scrip under Served from India Scheme (SFIS)

[TS-480-HC-2015 (BOM)-FTP]

2 Karnataka High Court rules that implementation of customized software is a service and cannot be subject to VAT

14 September 2015 Infosys Ltd. v. Deputy Commissioner of Commercial Taxes and others

[2015-TIOL-2106-HC-KAR-VAT]

3 Clarification regarding determination of turnover for the purpose of Local Body Tax (LBT) in Maharashtra

16 September 2015 Notification No. LBT. 2015/C.R. 42/UD-32. dated 15 September 2015

4 High Court rules that “in-transit sale” in turnkey contracts not eligible for exemption under Section 6(2) of the Central Sales Tax Act

23 September 2015 Larsen & Toubro Ltd. v. State of Andhra Pradesh and Others

[TS-507-HC-2015(TEL_and_AP)-VAT]

5 Supreme Court admits appeal to determine the eligibility to avail CENVAT credit of duty paid on telecom towers

24 September 2015 Vodafone India Ltd. v. Commissioner of Central Excise.

[TS-488-HC-2015(BOM)-EXC]

6 CBEC issues clarification in respect of levy of Service tax on services provided by Goods Transport Agency

6 October 2015 CBEC Circular No. 186/5/2015 dated 5 October 2015

7 GST News Alert - Reports of Joint Committee constituted by Empowered Committee of State Finance Ministers on Business processes of payment, registration and refund under GST

7 October 2015 Three reports of the Joint Committee with respect to registration, payment and refund processes under the GST regime released by the MoF released on 6 October 2015.

8 SC rules that anti-dumping duty cannot be levied during the period between the expiry of a provisional duty notification and imposition of final duty

8 October 2015 Commissioner of Customs v. G.M. Exports & Others

[TS-518-SC-2015-CUST]

9 Amendments proposed in Tamil Nadu VAT Act, 2006 9 October 2015 Amendments proposed in the Tamil Nadu Value Added Tax Act, 2006 vide L.A. Bill Nos. 8 and 9/2015

62 Tax Digest

Sl. No. Title Date of the alert Citation/Notification/Circular

10 Report of Joint Committee constituted by Empowered Committee of the State Finance Ministers on business processes for return under GST

21 October 2015 Fourth report of the Joint Committee with respect to filing of GST returns under the GST regime released by the MoF released on 20 October 2015.

11 SC decision regarding excise duty on freight charges incurred by the manufacturer for transportation of goods from factory gate to buyer’s premises

26 October 2015 Commissioner of Customs & Central Excise v. Ispat Industries Ltd.

[2015-TIOL-238-SC-CX]

12 CBEC issues revised guidelines for prosecution and arrest under Central Excise, Service tax and Customs laws

28 October 2015 CBEC circulars dated 23 Oct 2015:

Circular No. 27/2015 for Customs

Circular No. 1009/16/2015 for Excise and Service tax

Circular No. 28/2015 for Customs

Circular No. 1010/17/2015 for Excise and Service tax

13 CENVAT Credit Rules amended to provide for utilization of Education Cess and Secondary & Higher Education Cess against Service tax payment

30 October 2015 Notification No. 22/2015 dated 29 October 2015, issued by the Ministry of Finance (Department of Revenue)

14 Kerala HC held that the penal proceedings cannot be initiated in absence of determination of sales under the Kerala VAT Act

3 November 2015 Flipkart Internet Pvt. Ltd. v. State of Kerala

[2015-TIOL-2510-HC-KERALA-VAT]

15 Levy of Swachh Bharat Cess @ 0.5% on value of taxable services

6 November 2015 Notification nos. 21/2015-ST and 22/2015-ST dated 6 November 2015

63 Tax Digest

Sl. No. Title Date of the alert Citation/Notification/Circular

16 Clarifications issued with regard to levy of Swachh Bharat Cess effective from 15 November 2015

13 November 2015 Notification No 23/2015 –ST dated 12 November 2015

Notification No 24/2015 –ST dated 12 November 2015

Notification No 25/2015 –ST dated 12 November 2015

17 CBEC formulates a scheme for speedy disbursal of pending refund claims of exporters of service under Rule 5 of the CENVAT Credit Rules, 2004

16 November 2015 CBEC Circular no. 187/6/2015-Service Tax dated 10 November 2015

64 Tax Digest

Regulatory

Sl. No. Title Date of the alert Citation/Notification/Circular

1 SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 notified on 2 September 2015 (M&A Perspective)

9 September 2015 The key highlights of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 from M&A Perspective.

2 FDI Policy – Facility Sharing Arrangements between Group Companies/ Issuance of Partly Paid up shares and Warrants

16 September 2015 Clarification issued by DIPP on FDI Policy on Facility Sharing Arrangements between Group

Companies/ Issuance of Partly Paid up shares and Warrants

3 External Commercial Borrowings Policy – Issuance of Rupee Denominated Bonds Overseas

14 October 2015 RBI circular in respect of the framework for issuance of rupee denominated bonds overseas within the overarching ECB Policy

4 Insurance Regulatory and Development Authority of India (IRDA) issues guidelines on ‘Indian owned and controlled’

27 October 2015 IRDA/F&A/GDL/GLD/180/10/2015 dated 19 October 2015

5 IRDA issues regulations on registration and operations of Branch officers of foreign reinsurers (other than Lloyd’s)

9 November 2015 Regulations issued by IRDA - F.No.IRDAI/Reg/17/107/2015

6 RBI issues notifications permitting foreign investments in Indian investment vehicles

20 November 2015 RBI Notification No. FEMA 355/2015

7 Liberalization – FDI Policy 25 November 2015 Press Note 12 of 2015

8 ECB Policy- revised framework 4 December 2015 RBI circular No. A.P. (DIR Series) 32 dated 30 November 2015

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