Can a branch engaged in preparation of drawings, designs and structural calculations by engaging highly technical and skilled professionals, which constitutes the core business of the Head Office (HO), be considered as a Permanent Establishment (PE) of the HO in India?
Consulting Engineering Corporation vs. JDIT
- The Taxpayer, a US Company, has a branch in India. The Indian branch provided engineering design and consultancy services to its HO, i.e., the Taxpayer.
- As part of these services, the branch prepared drawings and designs and also structural calculations by engaging highly technical and skilled professionals. For these services, the branch was reimbursed at cost plus margin.
- The Tax authority contended that the presence of Tax-payer in the form of fixed assets, number of employees etc., in India indicates that the activities carried out by the branch constituted the main business of the Taxpayer and the cost reimbursed by the Taxpayer has a PE in India as per India-USA DTAA and the Income attributable to the operation carried out by the PE shall be taxable in terms of Article 7 of the India US DTAA.
- The Taxpayer contended that the activities of the branch were in the nature of preparatory and auxiliary services and hence the branch does not constitute a PE of the Taxpayer in India. Consequently, no income can be assessed in terms of Article 7 of the India-US DTAA.
- The Tribunal ruled in favour of the assessee observing that apart from preparation of drawings, designs and doing structural calculations, the branch was also doing research and development work for the Taxpayer which was the core business of the HO and thus could not be considered to be of auxiliary or preparatory in nature.
- Thus, in terms of Article 5 of
the India-USA DTAA, the branch constituted PE of the Taxpayer in India.
Amendment to Consolidated FDI policy circular 2014
A press note has with immediate effect revised paragraph 6.2.11 of ‘Consolidated FDI Policy Circular 2014’ pertaining to the Construction Development Sector.
The new provisions in the circular pertaining to minimum land requirements are as under:
- Development of serviced plots: No minimum land requirement (Previously, minimum land area of 10 hectares).
- Construction development projects: Minimum floor area of 20,000 sq. meters (Previously, minimum built-up area of 50,000 sq. meters).
- Combination project: Any of the above two conditions need to be complied with.
Can payments towards lease premium and additional FSI charges be subjected to TDS?
ACIT vs. ONGC Corporation Ltd.
- The issue before the Tribunal was about the eligibility to Tax deduction at Source (TDS) u/s. 194-I of the Income Tax Act, 1961 (“the Act”) of the sum, described as lease premium and additional Floor Space Index (FSI) charged paid by the assessee to MMRDA during the relevant year.
- The revenues case was that u/s. 194-I of the Act, rent is very comprehensively defined to include any payment made under the lease, sub-lease, tenancy or any such agreement or arrangement for use (either separately or together) of any land, building, plant, machinery, etc.
- By legal fiction, therefore, the scope of the term ‘rent’ stands thus extended beyond its common meaning. The same would include not only the payments on revenue account, but on capital account as well, as long as the sum is paid towards the use of any of the assets specified under the provision.
- The CIT (A) on appeal, held that the lease premium in the instant case was only towards the acquisition of lease hold rights and additional FSI in the leased plots and thus, the payment made was not in the nature of rent hence, not covered u/s. 194 (I).
- The Revenue decided to appeal to the Tribunal
- The Tribunal held in favour of the Assessee observing that, the whole transaction was for grant of lease-hold rights, which comprise a bundle of rights, including the right of possession, exploitation and its long term enjoyment.
- It was further observed that the charges for FSI take the character of capital assets in the form of Transferable Development Rights (TDR’s), such that the owner (of land) transfers the rights of development and exploitation of land, which rights are again capital in nature.
- On the basis of these reasons and taking into consideration the previous rulings in similar cases, the Tribunal upheld the decision of the CIT (A).
- Thus appeal of Revenue is dismissed.
Can the Assessing Officer (AO), without rejecting the books of the Assessee refer the matter to the DVO and make any additions based on DVO’s report?
CIT vs. Lakshmi Constructions; 369 ITR 271 (T&AP)
- For the A.Y. 1991-92, the assessee firm had disclosed a sum of Rs. 23,75,000/- towards the cost of construction of a building.
- The Assessing Officer, without rejecting the assessee’s books of account, referred the matter to the DVO and as per the report of the DVO treated the difference as unexplained investment.
- The CIT (A) as well as the Tribunal deleted the addition holding that reference to DVO could not have been made unless the AO rejected or doubted the veracity of the books of account of the Assessee.
- The Revenue decided to appeal to the Andhra Pradesh High Court.
- The High Court ruled in favour of the assessee observing that for any reference to the Valuation Officer to be made, the AO must first express his lack of confidence in the books of account.
- Since the AO made no such remark, reference to the DVO could not be sustained in law.
- Even though Section 142A of the Income Tax Act, 1961 (“the Act”) was amended in the year 2004 with retrospective effect from 1972, the exercise undertaken by the AO could not be sustained on that provision.
- Thus appeal of Revenue is denied.
Can income from surrendering tenancy rights be considered a capital gain?
ACIT vs. G.C. Shah; 369 ITR 323 (Guj)
- In the A.Y. 1992-93, the Assessing Officer (AO) found that the assessee had received Rs. 5 lakh as miscellaneous income from relinquishment of sub-tenancy rights of a property.
- The AO made an addition of Rs. 5 lakh as income under the head Income from other sources.
- The Tribunal held the amount taxable as Capital Gain and not income from other sources.
- The Revenue decided to appeal the decision.
- The Gujarat High Court upheld the decision of the Tribunal observing that the amount received towards surrendering the tenancy rights could only be taken under the head “Capital Gains” and not under any other head.
- Thus ruled in favour of the Assessee.
Another Turnaround for FDI – RBI relaxes norms for issuance of Equity shares to persons residing outside India
The regulatory environment concerning the foreign investment in India has been under constant evolution. In recent times the Reserve Bank of India (RBI) has been consistently making endeavors to ensure availability of funds to India Inc. After the noted change was introduced by RBI on 3rd September, 2014 wherein RBI vide RBI/2014-15/207 A.P. (DIR Series) Circular No.253 relaxed the ECB norms for overseas lenders by allowing them to extend loans in Indian currency, the banking regulator on 17thSeptember, 2014 vide RBI/2014-15/234 A.P. (DIR Series) Circular No.31 eased the norms for issuance of Equity shares by companies to a resident outside India. The necessary amendment to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) 2000 was carried out by insertion of new clause (iv) in Paragraph 2 of Schedule 1 vide RBI Notification No. FEMA. 315/2014-RB dated 10th July, 2014 which came into force on 2nd September, 2014, the date of publication in the official gazette. Relevant extracts are reproduced in italics below:
Schedule I – Foreign Direct Investment Scheme
Automatic Route of Reserve Bank for Issue of shares by an Indian company
An Indian company, otherwise eligible to issue shares under this Schedule may issue equity/preference shares, subject to pricing guidelines as given in paragraph 5 of this Schedule, to a person resident outside India, against any other funds payable by the investee company, remittance of which does not require prior permission of the Government of India or Reserve Bank of India under FEMA ,1999 or any rules/ regulations framed or directions issued there under, provided that:
i. The equity shares shall be issued in accordance with the extant FDI guidelines on sectoral caps, pricing guidelines etc. as amended by Reserve Bank of India, from time to time;
ii. The issue of equity shares under this provision shall be subject to tax laws as applicable to the funds payable and the conversion to equity should be net of applicable taxes.
A crisp view on the noted progress has been discussed below. Present Circular Before the issuance of the recent RBI circular, Indian companies were eligible to issue shares/convertible debentures under the automatic route to a person resident outside India against the following funds:
- Lump- sum Technical know-how fees;
- External Commercial Borrowings (ECBs) (other than import dues deemed as ECB or Trade Credit as per RBI guidelines)
- Import payables of capital goods by units in Special Economic Zones.
Furtherance to this the banking regulator has relaxed norms RBI/2014-15/234 A.P. (DIR Series) Circular No.31 for issue of equity shares by the Indian company. The new norm has been explained diagrammatically:
Can services such as accounting & legal support, sales & marketing, HR services etc rendered from own knowledge and experience without imparting the know-how to other person fall under the definition of royalty under the India-Thailand Double Taxation Avoidance Agreement (DTAA)?
GECF Asia Limited vs. DDIT [Dated: 06-08-2014]
- The Taxpayer, a Thai resident entered into a master agreement with Indian company (I Co) to provide various services such as accounting and finance support, legal and compliance services and marketing services, etc.
- The Taxpayer filed NIL return for the relevant assessment year on the ground that the income accrued to him on account of above services qualifies as business income and the same cannot be taxed under Article 7 of India-Thailand DTAA in the absence of a Permanent establishment (PE) in India.
- The Tax Authority, in its draft order, held that the fee received by the taxpayer from I Co qualifies as fees for technical services (FTS) under the Income Tax Act, 1961 (“the Act”) and alternatively such fee would also fall within the definition of “royalty” under the India – Thailand DTAA. Thus such income would be Taxable in India.
- Aggrieved, the Taxpayer filed its objections before the Dispute resolution panel (DRP). However also concluded that the fee by the Taxpayer is for providing industrial, commercial or scientific experience and, hence the fee constituted “Royalty” under the DTAA, and hence it would be taxable in India.
- Aggrieved the Taxpayer appealed to the Tribunal.
- Royalty is defined under the India-Thailand DTAA to include payments of any kind received as a consideration for the use of, or the right to use, information concerning industrial, commercial, or scientific experience.
- Consideration for information concerning industrial, commercial, scientific experience to be regarded as royalty should allude to the concept of knowhow. There should be an element of imparting of knowhow to the other, so that the other person can use or has right to use such knowhow.
- If services are being rendered simply as an advisory or consultancy, then it cannot be termed as “royalty”, because the advisor or consultant is not imparting his skill or experience to others, nut rendering his services from his own knowhow and experience.
- If there is no “alienation” or the “use of” or the “right to use of” any knowhow i.e., there is no imparting or transfer of any knowledge, experience or skill or knowhow, then it cannot be termed as “royalty”
- In principle, if the services have been rendered without an agreement, the imparting of knowhow or transfer of any knowledge, experience or skill, then such services will not fall within the ambit of royalty.
Accordingly, the matter was restored back to Tax Authority to examine the nature of services based on the above principles
Can purchases be disallowed merely because the supplier is treated as a havala dealer by VAT authorities?
Rajeev G Kalathil vs. DCIT : ITA No. 6727 / Mum / 2012
- The Assessing Oficer (AO) asked the assessee to furnish correct address or explain why purchases of Rs. 13,69,417 (Rs. 5,05,259 from NBE and Rs. 8,64,158 from DKE) should not be treated as bogus purchases.
- The assessee furnished its reply expressing inability to establish contact with the parties but furnished letter from its banker stating that the payment has been made to the two parties in subsequent year. Sample bills were also filed which had TIN numbers.
- The AO verified the TIN number and found that NBE was specifically mentioned as havala dealer and search for DKE did not show any result. He accordingly added 13.69 lakh to total income of the assessee on account of bogus purchases.
- Aggrieved the assessee preferred an appeal to CIT(A) and contended that suppliers were registered dealers and were carrying proper VAT registration. The CIT(A) allowed the appeal.
- The revenue decided to appeal the decision.
- The Tribunal held in favour of the assessee observing that the transportation of goods to the site is one of the deciding factors to be considered for resolving the issue. It noted the finding of fact given by CIT(A) that some of the goods received were forming part of closing stock.
- Also, in present case there is evidence of movement of movement of goods and also cash withdrawn by the supplier immediately from the bank.
Thus appeal filed by revenue is dismissed.
Can disallowance u/s. 40(a)(ia) be invoked if assessee fails to deduct tax at source but the recipient has offered to tax the same in his tax return?
Rajeev Kumar Agarwal vs. Addl CIT
- The assessee had made interest payments without discharging his tax withholding obligations u/s. 194A. Thus the Assessing Officer disallowed payments u/s. 40(a)(ia)
- The assessee argued that, in view of the insertion of second 40(a)(ia)by The Finance Act, 2012, and in view of the fact that the recipient of the interest had already included the income embedded in the said interest payments in their tax returns filed u/s. 139, disallowance u/s. 40(a)(ia) could not be invoked in this case.
- He also argued that since the said second proviso to section 40(a)(ia) is ‘declaratory and curative’ in nature, it should be given retrospective effect from 1st April 2005 as that is the date from which sub-clause (ia) of section 40(a) was inserted by the Finance Act, 2004.
- The High Court held in favour of the assessee observing that purpose of section 40(a)(ia) is to ensure that an expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee.
- The provisions of section 40(a)(ia), before the insertion of second proviso went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee’s tax withholding did not lead to any loss to the govt.
- In view of the legal position that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of second proviso to section 40(a)(ia) must be given retrospective effect from the point of time when the related legal provision was introduced.
Thus ruled in favour of assessee.
Can disallowance of interest u/s. 14A of the Income Tax Act, 1961 be justified if available interest free funds are more than the investment in tax free securities?
CIT vs. HDFC Bank Ltd. (Bom): ITA No. 330 of 2012 dated 23-07-2014
- In the relevant years, the assessee claimed that no disallowance of interest be made u/s. 14A of the Income Tax Act, 1961, in view of the fact that the assessee had interest free funds available more than investment in tax free securities.
- The Assessing Officer rejected the claim and made disallowance of interest u/s. 14A on proportionate basis.
- The tribunal deleted the addition.
- Unsatisfied, the revenue decided to appeal the decision.
- The Bombay High Court upheld the decision of the tribunal observing that the facts of the present case have already been covered in the case of Reliance Utilities and Power Ltd.; 313 ITR 340 (Bom).
- In the present case, it is clear the assessee’s capital, profit reserve, surplus and current account deposits were higher than the investment in the tax-free securities. Taking note of this fact as well as the verdict of this court in the case of Reliance Utilities and Power Ltd.; 313 ITR 340 (Bom), it would have to be presumed that the investment made by the assessee would be out of the interest free funds available with the assessee.
Appeal of tribunal is therefore rejected.