Tax Digest

March 2015

2 Tax Digest

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

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. It provides access to “In the press” section, which includes published articles on various issues in the tax realm over the last quarter. It also gives details of 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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Contents

Direct taxVerdicts

• Reported decisions supported by our Litigation team

• Bombay High Court agrees on no split of sale consideration as towards non-compete

• On facts, gains from sale of shares taxed as capital gains, not business income

• Non recording of receipt date of Dispute Resolution Panel’s (DRP) direction cannot be an excuse to justify a belated order

• Rulings on income linked incentive deductions

• Compilation of content and transmission in digital form amounts to manufacture of computer software

• Rent from temporary sub-letting of office premises is eligible for incentive deduction

• Rulings on tax withholding

• Exhibition of films, not “work” under tax withholding provisions of ITL

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• Transmission charged under a gas supply agreement is not liable to withholding tax

• Fixed working hours and fixed remuneration paid by hospitals to doctors is not conclusive of employer-employee relationship

• Levy of fees for delayed filing of tax withholding statements constitutionally valid

• HC directs disposal of lower / nil tax withholding applications within a reasonable time, i.e., six weeks

• Sale of timber imported from abroad also liable for tax collection at source

• Characterization of expenditure – Revenue v. Capital

• Royalty payment for use of technology for 10 years is revenue in nature

• Deductibility of expenditure

• Advertisement expenditure as per distribution rights agreement is deductible

• Valuation rules under Excise Act cannot be a basis to determine deductibility of expenditure

• Premium on premature debenture redemption, revenue in nature

• Amendment providing for tax WDV for computation of depreciation post-demerger, retrospective in nature

• Levy of penalty

• Concealment penalty on denial of baseless claim cannot be defended on grounds of legal advice

• Bonafide cash loans supported by ‘business exigency’ is not a fit case for levy of penalty

• Issues on taxability of capital gains

• Period of holding of capital asset to be counted from date of development agreement

• Issues on computation of book profit under MAT provisions

• Andhra Pradesh HC rules, no double taxation under MAT provisions

• Revenue expense fully deductible under MAT despite amortization in books

• Other significant rulings

• Karnataka HC distinguishes between “service” and “right to service”, the latter being saleable

• Mumbai Tribunal explains distinction between “sale” and “right to use” capacity in telecom cable network

• Karnataka HC rules on minimum holding period prior to date of sale for ‘dividend stripping’ transactions

• Dominant object is critical in evaluating charitable status of an institution

• Advance to sister concern for indirect benefit of lender company, not regarded as deemed dividend

• Delhi Tribunal rules on carry forward of business loss in intragroup change in shareholding

• HC dismissed taxpayer’s writ challenging notification of Cyprus

• “Slot Charter” income eligible for Tonnage Tax Scheme

• “Pick and choose” of orders for the purpose of revision/appeal is against the principle of equal application of law

• Is there a Permanent Establishment (PE)?

• Jabalpur Tribunal rules on interplay between provisions of PE and FTS for taxing installation/commissioning activities in composite contracts

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• Service PE created by activities of employees deputed to India, not taxable as FIS

• Indian subsidiary carrying out outsourced functions of Swiss re-insurance company does not create a PE

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

• Recent decisions on taxation of Royalty/FTS payments

From the Tax Gatherer’s desk

• Government of India notifies class of resident taxpayers eligible to seek Advance Ruling

• High Level Committee constituted to interact with trade and Industry and to bring in clarity on tax laws

• CBDT releases revised draft of Income Computation and Disclosure Standards for public comments

• CBDT clarifies no interest levy for delay in furnishing tax return if tax is paid before due date for filing tax return

• Indian administration clarifies on the quantum of disallowance for failure to withhold taxes at source on payments to a non - resident

• Shift in focus of the Tax Authority from civil consequences to criminal consequences in serious cases of tax evasion

• CBDT issues Guidelines for Compounding of offences Under ITL

Happenings across the border

• UK announces new Diverted Profits Tax

• China issues administrative guidance on general anti-avoidance rules

• China issues circular to encourage corporate restructuring

• Thailand approves tax incentives for international headquarters and international trading centers

• New minimum tax on foreign earnings and one-time tax on accumulated foreign earnings featured in US Administration’s fiscal year 2016 Budget

• China issues indirect transfer rule replacing existing Circular

Treaty/OECD Updates

• Treaty updates

• Protocol amending India-South Africa DTAA enters into force

• OECD BEPS updates

• OECD releases discussion draft on use of profit split method in global value chains under BEPS Action 10

• OECD releases discussion draft on more effective dispute resolution mechanisms under BEPS Action 14

• OECD releases Discussion Draft on cross-border commodity transactions under BEPS AP 10

• OECD releases Discussion Draft on interest deductions under BEPS Action 4

• OECD releases discussion draft under BEPS Actions 8-10 on risk, recharacterization, and special measures

• OECD explains agreed approach on intangible property regimes under BEPS Action 5

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• OECD issues mandate for negotiation of multilateral instrument under BEPS Action 15

• OECD issues implementation guidelines for country-by-country reporting under BEPS AP 13

Indirect taxCase lawsService tax

• Ancillary and incidental activities of pouring, pumping and laying of concrete during supply of Ready Mix Concrete is not a taxable service

• Consideration paid for production of audio-visual coverage of cricket matches held liable to Service tax under reverse charge mechanism

• Maintenance or repairs of any ‘part’ of the ‘Motor vehicle’ excluded from the scope of Management, Maintenance or Repair Services

• Supreme Court stays operation of High Court order that had struck down Rule 5A(2) of Service Tax Rules, 1994

• Sponsorship services received in relation to sports events would not attract Service tax

• Refund of Service tax paid on Goods Transport Operator service disallowed (during the period 1997 to 1999) vide Supreme Court’s decision in Gujarat Ambuja

• Merely because Service tax was paid prior to issuance of show cause notice (SCN), the assessee not exonerated from penalty under Section 78

• Services provided by clubs to its members held not liable to Service tax prior to introduction of negative list of services

• Revenue had raised notice and the assessee had paid Service tax under protest alongwith a writ petition challenging such a notice, High Court directed Revenue to complete adjudication and refund Service tax, if demand is dropped

• Pre-deposit of 10% reduced – Discussion of Stay applications and appeals pending before any appellate authority, prior to the commencement of the Finance Act, 2014

• Refund for Service tax paid which was never due held as “deposit”; No limitation under Section 11B of Central Excise Act, 1944

• Works contract service portion liable to Service tax even prior to 1 June 2007

• Only rate of tax prevailing at time of rendition of taxable service could be levied and collected; rate in force on date when payment is made or received cannot be made applicable

• Bundling issue examined by Belgian Courts regarding VAT issue of grant of right to use a football stadium

CENVAT credit/ Central Excise

• No intention of framers of Rules to deny MODVAT credit simply because inputs were not received after job work within 180 days; Period of 180 days cannot be held to be mandatory

• Credit admissible on inputs used in manufacture of finished goods that were destroyed in a fire – Erstwhile Rule 57A did not mandate that the credit of duty can be claimed only if there is emergence of a final product or that the manufacture of the final product is complete

• Storage tanks not ‘capital goods’ under erstwhile Rule 57Q; Credit inadmissible pre-2001

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Customs

• The assessee cannot have any apprehension that they will not be dealt in accordance with law.

• Redemption fine not imposable when export goods were not available for confiscation

• No bar against pleading a law point at any stage

• Royalty or license fee held not includible when paid by the assessee for the technical know-how received and has nothing to do with the imports of raw materials

• Lumpsum amount paid to related parties towards trademark fees and royalty for technical know-how shall not be added to import value of material and parts imported from the same related party

• Royalty payments made in respect of technical know-how and fees paid for basic engineering and supervisory services found to be includible

• Exemption unavailable where imported road construction equipment diverted violating actual user condition

VAT/Central Sales Tax (CST)

• Sales tax levy upheld – High Court distinguishes the landmark ruling of Hon’ble Supreme Court in the case of BSNL related to right to use of goods

• Supply of medicine/stent supply in medical surgeries not ‘deemed sale’

• Hydraulic Excavator is held to be a ‘Motor vehicle’ and not ‘Machine’

• Work stations not ‘Furniture’ but accessory to computer, allows input tax credit

Key statutory updates

• Service tax

• Central Excise Duty/CENVAT credit

• Customs

• Special Economic Zones (SEZ)

• Foreign Trade Policy (FTP)

• VAT/CST Notifications

• Miscellaneous

Regulatory

Foreign Direct Investment (FDI) Policy

• Department of Industrial Policy & Promotion (DIPP)

• Mapping sectors in FDI policy with NIC 2008

• Review of FDI policy in Pharmaceutical sector – carve out for medical devices Reserve Bank of India (RBI)

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What’s new Useful links

(Click to navigate)

For insightful articles, interviews and thought leaderships to aid business leaders: India Tax Insights

Global compliance and reporting : Why EY

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

Budget Connect 2015

Tax Library

www.ey.com

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• Reserve Bank of India

• Reporting under FDI Scheme on the e-Biz platform

• Alignment of FDI policy by RBI

• Indian Insurance Companies (Foreign Investment) Rules, 2015

• Overseas Investments by Alternative Investment Funds (AIF)

• Overseas Direct Investments (ODI) by Indian Party – Rationalization / Liberalization

• ODI by proprietorship concern / unregistered partnership firm in India

• Proposal for enhancement in the limit under LRS

• Expansion in options of securities for External Commercial Borrowings (ECB)

• Multiple rescheduling of ECB now permitted

• RBI’s check on delay in utilization of Advance received for Exports

• Import of goods into India

• Remittance of salary to employee deputed to Indian Group company

• Depository Receipts Scheme

In the press

Compilation of alerts

• Direct Tax

• Indirect Tax

• Regulatory

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Verdicts

Direct taxReported decisions supported by our Litigation team

Bombay High Court agrees on no split of sale consideration as towards non-compete

In case of Govindlal C. Mandhana (Bom HC) [ITA No. 1221 of 2012 & 1222 of 2012], the Taxpayer was one of the venture partners of a joint venture (JV) company. The Taxpayer transferred his share in the JV to a Dutch company pursuant to an agreement and offered the resultant income as capital gains. One of the clauses of the agreement provided that the Taxpayer will not carry on, or, be interested in any business which competes with the business of the JV company. The Tax Authority therefore split the consideration received as towards non-compete (taxable as business income) and transfer of shares (taxable as capital gains). On appeal, the Bombay High Court (HC) upheld the Income Tax Appellate Tribunal (ITAT) order that there was no specific amount attributable towards non-compete mentioned in the agreement and hence, the same could not be taxed as business income.

On facts, gains from sale of shares taxed as capital gains, not business income

In case of Milan D. Shah [6526/Mum/2010], the Taxpayer was engaged in share trading. During the year under consideration, the Taxpayer had offered gains on sale of shares as short-term capital gains. However, in the assessment proceedings, the Tax Authority treated the same as business income. The ITAT, held that the gain on sale of shares shown under the head investment is to be taxed as capital gains on account of factors such as delivery-based transactions, maintenance of separate portfolios for business and investment purpose, investment made out of surplus funds, and substantial dividend income earned etc.

Non recording of receipt date of Dispute Resolution Panel’s (DRP) direction cannot be an excuse to justify a belated order

In case of Envestnet Asset Management [ITA No.244/Coch/2014], the Cochin ITAT quashed the order of the Tax Authority, since the same was barred by limitation. Under the Income Tax Laws (ITL), the Tax Authority ought

to have passed its order within one month from the date of receipt of DRP’s direction. However, the order was passed after four months from the date of DRP’s order. The Tax Authority contended that date of receipt of DRP’s direction was not recorded. The ITAT rejected the Tax Authority’s contention and held that it is a mandatory requirement for the Tax Authority to record the date of actual receipt of the directions of the DRP when the provisions provide for a deadline of one month for passing the order from the date of receipt of the directions of the DRP.

Rulings on income-linked incentive deductions

Compilation of content and transmission in digital form amounts to manufacture of computer software

The Delhi HC, in case of CIT v. Kiran Kapoor [TS-29-HC-2015(Del)], referring to its ruling in case of Lovesh Jain [204 Taxman 134(Del)], held that the Taxpayer’s activity of collection, collation, formatting of data/information and transmission outside India in electronic form for publication/printing of books amounts to “manufacture”. This process renders a commodity or article fit for use, which otherwise it was not. The HC further held that the resulting output can be regarded as computer software in light of a Central Board of Direct Taxes (CBDT) Circular, which includes “content development or animation” as an eligible service within the scope of the relevant incentive provision. Accordingly, the Taxpayer was eligible for profit-linked tax incentive under the provisions of the ITL on income earned from such activity.

Rent from temporary sub-letting of office premises is eligible for incentive deduction

In case of Subex Ltd. v. ITO [TS-812-HC-2014(Kar), a portion of the Taxpayer’s office premises was vacant and hence, was sub-let temporarily. The Karnataka HC held that rental income earned from such sub-leasing, is deemed to be “profits of the undertaking” eligible for deduction under income-linked incentive available to an undertaking established in a Free Trade Zone (FTZ). The HC observed that profits of the business of an undertaking will not

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9 Tax Digest

only include profits and gains from exports of articles or things or computer software, but will also include some other incidental profits derived from the business of the undertaking.

Rulings on tax withholding

Exhibition of films not “work” under tax withholding provisions of ITL

In case of CIT v. City Gold Entertainment Pvt. Ltd [TS-752-HC-2014(Guj)], the Gujarat HC upheld the ITAT’s ruling that exhibition of films in theatres cannot qualify as “work” under the ITL and hence, there was no requirement to withhold taxes from payments to a distributor of films. A distributor gets its share from the taxpayer-theatre because it has acquired rights of distribution of the film in a particular area and not because it has carried out any “work” as such.

Transmission charged under a gas supply agreement is not liable to withholding tax

In the case of ITO v. Samtel Glass Ltd. [TS-756-HC-2014(Raj], the Rajasthan HC upheld the ITAT’s ruling that transmission charges paid by the Taxpayer to Gas Authority of India Ltd. (GAIL) under a gas supply agreement is towards purchase of gas. It does not require tax withholding. The HC noted that the supplier had charged Value Added Tax (VAT) on the sale amount. Moreover, the intention of both, the seller and the buyer was of sale and purchase of gas. Hence, such amount could not be said to be towards provision of technical services.

Fixed working hours and fixed remuneration paid by hospitals to doctors is not conclusive of employer-employee relationship

In case of CIT v. Grand Medical Foundation [TS-54-HC-2015(Bom)], the Bombay HC held that under the given facts of the case, payments made by hospitals to doctors will qualify as fees for professional services for the purpose of withholding tax provisions and not salary. The HC observed that there is no absolute rule or principle of general application and the relationship of doctors with hospitals has to be determined on reading of the

contract as a whole and attendant facts and circumstances. Presence of features such as fixed working hours or fixed remuneration will not, by themselves, be indicative of employer-employee relationship. In the given case these were restrictions placed on the doctors in the interests of patients and to ensure optimum utilization of hospital’s infrastructure and facilities.

Levy of fees for delayed filing of tax withholding statements constitutionally valid

In the case of Rashmikant Kundalia & Anr v. UoI [TS-44-HC-2015(Bom)], the Bombay HC upheld the constitutional validity of ITL provisions providing for levy of fees on delay in furnishing the tax withholding statement. The HC held that “fee” payable under the ITL provision is in the nature of compensation for additional work burden on the tax authority arising on account of late filing of tax withholding statements. It is not an extraction of tax in the guise of fees. The HC noted that late filing of tax withholding statements results in delay in processing tax credits for deductees leading to delay in grant of refunds or raising infructuous demands against deductees involving additional work burden on the Tax Authority. Furthermore, the HC held that absence of Tax Authority’s power to condone delay or absence of right of appeal to the taxpayer will not make the provision onerous.

HC directs disposal of lower/nil tax withholding applications within a reasonable time, i.e., six weeks

In case of Dharamshila Cancer Foundation and Research Centre v. CIT [TS-773-HC-2014(Del)], the HC observed that any low/nil withholding application made by the Taxpayer should be disposed of within reasonable time, which in the view of the HC should not be more than 6 weeks.

Sale of timber imported from abroad also liable for tax collection at source

The Kerala HC, in case of Excel Timbers Pvt. Ltd. v. DCIT [TS-823-HC-2014(Ker)], held that the provisions of tax collection at source on sale of timber, are applicable in case of import of timber from overseas as well. The HC rejected the Taxpayer’s contention that the expression, “Timber obtained by any mode other than under a forest lease”, as appearing under the tax collecting provisions, only includes

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10 Tax Digest

timber obtained from Indian soil and not from overseas. The HC held that provisions of the ITL do not distinguish between timber sourced in India and timber imported from outside India.

Characterization of expenditure – Revenue v. Capital

Royalty payment for use of technology for 10 years is revenue in nature

In case of CIT v. Hero Honda Motors Limited [TS-40-HC-2015(Del)], the Delhi HC ruled that payment of royalty made by the Taxpayer to Honda Motorcycle Company Ltd. (Honda) for use of technology qualifies as revenue expenditure. The HC observed that payment was made for “right to use” or “for access to the technical knowhow and information”. Ownership in the intangible continued to remain the exclusive and sole property of Honda. Although after 10 years, the Taxpayer could still use the technical know-how and information, it will be trivial and inconsequential, since the technology keeps upgrading constantly and rapidly in the automobile industry. Under these circumstances, the HC did not accept the Tax Authority’s contention that payments resulted in enduring benefit to the taxpayer.

Deductibility of expenditure

Advertisement expenditure according to distribution rights agreement is deductible

In the case of CIT v. Discovery Communication India [TS-754-HC-2014(Del)], the Taxpayer entered a license agreement with an associated enterprise (AE) for distribution rights whereby the Taxpayer was duty bound to advertise and promote channels of the AE in India. The advertisement and promotion expenditure so incurred by the Taxpayer were disallowed by the Tax Authority. The HC however, allowed the Taxpayer’s claim noting that the agreement mandated the Taxpayer to develop viewership of channels of the AE in India. Merely because the advertisement expenditure incurred by the Taxpayer benefited a third party will not render the expenditure as

not being wholly and exclusively incurred for the Taxpayer’s business. On reasonability of expenditure, the HC held that the Tax Authority cannot question the reasonableness by putting itself in the arm-chair of the businessmen.

Valuation rules under Excise Act cannot be a basis to determine deductibility of expenditure

In case of CIT v. Tupperware India P. Ltd. [TS-815-HC-2014(DEL)], the Delhi HC allowed deduction of hire charges paid on plastic modules, which were supplied to a contractor manufacturer on a free of cost basis. The Tax Authority contended that according to Excise valuation rules, hire charges are part of manufacturing cost for the contract manufacturer and hence, cannot be allowed to the Taxpayer. The HC held that according to the provisions of the ITL, expenditure incurred “for the purpose of business” is allowable as deduction. If it is established that expenditure is incurred for the purpose of business, valuation norms under Excise Act do not bear any relevance to determine deductibility under the ITL.

Premium on premature debenture redemption, revenue in nature

The Bombay HC, in case of Grindwell Norton Ltd. [TS-787-HC-2014(Bom)], held that premium paid on premature redemption of debenture is deductible as revenue expenditure. Premature redemption of premium took place after mutual agreement. Hence, there was no need to amortize the premium amount.

Amendment providing for tax written down value (WDV) for computation of depreciation post-demerger, retrospective in nature

In case of Godrej & Boyce Mfg. Co. Ltd. v. CIT[TS-803-ITAT-2014(Mum)], the Mumbai ITAT ruled that after the demerger, depreciation is to be computed on “tax WDV” and not “book WDV” in the hands of resulting company. The Taxpayer contended that according to the provisions of the ITL as amended by the Finance Act (FA) 2000, book WDV should be taken into consideration and the amendment made vide FA 2003, deleting the words “as appearing in books of accounts” were prospective in nature and not applicable to tax year 2003–04. The ITAT held that the amendment made by FA 2003 was clarificatory in nature and hence, applies retrospectively.

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Levy of penalty

Concealment penalty on denial of baseless claim cannot be defended on grounds of legal advice

In case of CIT v. NG Technologies Ltd. [TS-743-HC-2014(Del)], the Delhi HC upheld levy of concealment penalty for furnishing of inaccurate particulars of income claiming loss on sale of fixed-asset as “business loss”. The HC held that cushion of legal opinion will not justify the bona fide belief where the claim is baseless and contrary to basic and well known principle of accountancy.

Bonafide cash loans supported by “business exigency” is not a fit case for levy of penalty

In case of CIT v. T Perumal [TS-824-HC-2014(Mad)], the Taxpayer, a civil constructor, borrowed cash from friends due to emergency such as labor payments on a bank holiday. Cash borrowed was supported by affidavits from the respective lenders. The Madras HC noted that loans taken were genuine and were on account of business exigency. The HC, therefore, held that a reasonable cause was established and confirmed non-levy of penalty.

Issues on taxability of capital gains

Period of holding of capital asset to be counted from date of development agreement

The Madras HC, in case of CIT v.S. R. Jeyashankar [TS-753-HC-2014(Mad)], held that the date of initial development agreement is to be taken as the date of purchase for the purpose of determining the nature of capital gain, i.e., short term or long term. The HC observed that the Taxpayer had right over the property sold from the date of entering into the development agreement with the builder.

Issues on computation of book profit under MAT provisions

Andhra Pradesh HC rules no double taxation under MAT provisions

In case of CIT v. Nagarjuna Fertilizers & Chemicals Ltd. [52 taxmann.com 397(AP)], the Taxpayer had initially credited

and reduced interest income from Capital Work-in-Progress in the Balance Sheet for four tax years. The Tax Authority had taxed such interest income under normal provisions in respective tax years. The Taxpayer changed its accounting policy in the fifth year (in which MAT was applicable) and credited the interest (including for the earlier four years) to Profit & Loss account (P&L), which was assessed to Minimum Alternate Tax (MAT).

The Andhra Pradesh HC, ruling in favor of the Taxpayer, held that the impugned interest income for earlier years cannot be taxed under MAT in the fifth year because (a) MAT is restricted to “incomes of relevant tax year” and incomes undisputedly pertaining to earlier tax year/s cannot be roped in for MAT; and (b) it is a cardinal principle of taxation that same income cannot be subjected to tax more than once in different years in absence of specific provisions and MAT provisions are no exception to this principle. The HC also held that the above conclusion is not affected by the ratio of Apollo Tyres’ ruling [255 ITR 273] which had held that P&L approved by company law authorities is binding on the Tax Authority.

(For more details, please refer EY Alert dated 8 January 2015)

Revenue expense fully deductible under MAT despite amortization in books

The Karnataka HC, in the case of CIT v. Karnataka Soaps & Detergents Ltd. [TS-765-HC-2014(Kar)], allowed full deduction for Deferred Revenue Expenses (DRE) in a separate P&L prepared for computing “book profit” on the basis that (a) object of MAT provisions is to prevent mischief of tax avoidance by adjusting accounts in a manner, which attracts no or low tax; (b) there is no intent to avoid tax by amortizing actual expenditure over several years instead of full debit in the year of incurrence; (c) book profit for the purposes of MAT should be computed based on accounts prepared in compliance with Schedule VI of the Companies Act(Cos Act) (d) concept of DRE is not recognized either by Cos Act or the ITL; (e) the Taxpayer was, therefore, entitled to full debit of DRE while preparing P&L according to Schedule VI of Cos Act for MAT purposes; (f) The printed accounts presented to shareholders in order to show increased profit by deferring expenditure to subsequent years will not reflect the true state of affairs and that cannot be made basis for levying MAT.

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Other significant rulings

Karnataka HC distinguishes between “service” and “right to service”, the latter being saleable

This ruling was delivered in the context of tax withholding obligation on payment towards commission or brokerage. In the case of Bharti Airtel Ltd & Ors. v. DCIT [TS-722-HC-2014(Kar)], the Karnataka HC analyzed the terms of agreement between the Taxpayers (telecom companies) and distributors, the manner of presentation of discount in the invoices raised and the treatment accorded in the books of account by taxpayers. The HC, thereafter, concluded that the relationship between them is on a principal-to-principal (P2P) basis and the discount allowed is in the nature of trade discount and not commission. Furthermore, the HC held that, although telecom companies render services to ultimate subscribers and SIM cards are only devices to access such services, the sale of SIM cards to distributors represents a sale of “right to service”. While a service can only be rendered and not sold, what is sold to distributors is the “right to service”, which is capable of being sold, and such “right to service” is acquired by distributors on a P2P basis.

(For more details, please refer EY Alert dated 5 December 2014)

Mumbai Tribunal explains distinction between “sale” and “right to use” capacity in telecom cable network

In case of Flag Telecom Group Ltd. v. DCIT [TS-42-ITAT-Mumbai(2015)], the Taxpayer, a company incorporated in Bermuda, was set up to build a high capacity fiber optic telecommunication link cable system between the UK and Japan. For this purpose, the Taxpayer entered a Memorandum of Understanding (MOU) with various national telecommunication companies (TCs). From India, Videsh Sanchar Nigam Ltd. (VSNL) was a party to the

MOU and part of this consortium. VSNL made a lump sum payment to the Taxpayer for purchase of certain capacity in the cable system. In addition, VSNL was also required to make payments for standby maintenance. The issue before the Mumbai Tribunal was to ascertain the nature of these payments in the hands of the taxpayer, whether business income or royalty or Fee for Technical Services (FTS). The Tribunal ruled that as VSNL acquired full ownership rights and obligations in respect of capacity purchased in the cable system, it was a sale transaction (business receipt) in the hands of the Taxpayer. As the Taxpayer did not have a business connection or any asset or source of income in India it was not taxable in India. Furthermore, as there was no actual rendering of services, but mere collection of an annual charge to recover the cost of standby facility, the payment for standby maintenance was not taxable as FTS in India.

(For more details, please refer EY Alert dated 10 February 2015)

Karnataka HC rules on minimum holding period prior to date of sale for “dividend stripping” transactions

The Karnataka HC in the case of CIT v. Sarosh Nowrojee Burjorjee [TS-802-HC-2014 (KAR)], held that under the provisions of dividend stripping, minimum holding period prior to the date of sale is to be counted from the date of acquisition of shares/units and not from the “record date”.

A conventional understanding has been that the minimum holding period prior to the date of sale of shares acquired within a period of three months prior to the “record date” was three months from the “record date”. As a consequence, anti-avoidance provisions are triggered, if shares acquired within three months prior to the “record date” are sold within a period of three months from the “record date”.

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Dominant object is critical in evaluating charitable status of an institution

In the case of India Trade Promotion Organization v. DGIT (Exemptions) [W.P. (C) 1872/2013], the Taxpayer whose primary object was to organize trade fairs and exhibitions to promote trade, commerce and business had considerable surplus, inter alia, on account of letting out space to various participants to organize trade fairs and exhibitions. The Tax Authority contended that the activity carried on by the Taxpayer was in the nature of trade, commerce or business or a service in relation to any trade, commerce or business and hence, it is ineligible for exemption. The Delhi HC held that where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advances of an object of general public utility, it has to be regarded as an institution established for charitable purposes.

Advance to sister concern for indirect benefit of lender company, not regarded as deemed dividend

In case of Bagmane Constructions Pvt. Ltd. v. CIT [TS-785-HC-2014(Kar)], the Karnataka HC held that advance given by a closely held taxpayer company to a shareholder or sister concern for purchase of land, which is likely to indirectly benefit the taxpayer company, is not to be considered as deemed dividend under the provisions of the ITL. The HC observed that advances were granted to buy agricultural land in the name of the directors and then transfer it to the taxpayer company after the agricultural land was converted into non-agricultural land. The HC also laid down that the word “advance” as appearing in the ITL should be understood in conjunction with the meaning of the word “loan”, appearing immediately thereafter. Hence, trade advances, not in the nature of loan, but to give effect to commercial transaction does not fall within the purview of deemed dividend.

Delhi Tribunal rules on carry forward of business loss in intragroup change in shareholding

In case of Yum Restaurants (India) Pvt. Ltd. v. ITO [TS-755-ITAT-2014(DEL)], there was a change in shareholding beyond the threshold of 51%. The change was in favor of a

sister subsidiary of the common ultimate holding company (UHC), i.e., within the same group. The Delhi Tribunal held that any change beyond 51% in the shareholding of the loss-making taxpayer company will trigger limitation of restriction on carry forward of past years’ business losses notwithstanding that the transfer is an intra-group transfer between companies with common UHC. The Tribunal ruled that although holding and subsidiary companies are bound by their relationship, nevertheless they do not lose their individual existence in the commercial world and both are separately liable for their respective transactions. Furthermore, the corporate veil cannot be pierced to treat both as one.

(For more details, please refer EY Alert dated 20 December 2014)

HC dismissed taxpayer’s writ challenging notification of Cyprus

In case of Expro Gulf Ltd. v. UoI [TS-11-HC-2015(Utt)], the Uttarakhand HC quashed the writ petition of the Taxpayer wherein the CBDT Notification, notifying Cyprus as a notified jurisdiction area (NJA) under the ITL was challenged. Cyprus was notified as NJA in November 2013, since the Government of Cyprus was not cooperating with the Government of India (GoI) and despite several requests, did not supply the information sought by GoI authorities. The HC held that reliance could not be placed on the Press Release issued by Cyprus Authorities stating that they never denied any information and they had been ready and willing to supply the information sought by the GoI. The HC observed that there are no valid reasons to disbelieve the satisfaction so recorded by the Indian Tax Authority.

“Slot Charter” income eligible for Tonnage Tax Scheme(TTS)

In case of Trans Asian Shipping Services Pvt. Ltd. v. CIT[TS-22-HC-2015(Ker)], reversing Tribunal’s ruling, the Kerala HC held that “slot charter” ships are eligible for TTS provided the Taxpayer is a “qualifying company”. The HC observed that provisions of the TTS nowhere contemplates that arrangements carried out through “qualifying ships” will only fall within the purview of “deemed tonnage”. The HC further stated that even Forms and Rules framed in this behalf, supports the view.

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14 Tax Digest

“Pick and choose” of orders for the purpose of revision/appeal is against the principle of equal application of law

In case of CIT v. State Bank of India [ITA No. 269 of 2013], the Bombay ITAT ruled on the eligibility of the Tax Authority to exercise the power of revision of orders prejudicial to the interests of the revenue. The HC referred to its earlier ruling in case of CIT v. Veena G. Shroff [ITA No. 71 of 2013] wherein it was held that the Tax Authority cannot pick and choose orders to file an appeal, rendering to negate the principle of equal application of law on all. In an appeal memo or in an affidavit filed before/at the hearing of the appeal for admission, the Tax Authority should set out reasons why the ratio of previous orders is inapplicable in the present facts, otherwise the appeal itself cannot be entertained.

Is there a Permanent Establishment (PE)?

Jabalpur Tribunal rules on interplay between provisions of PE and FTS for taxing installation/commissioning activities in composite contracts

In case of Birla Corporation Ltd. v. ACIT [TS-790-ITAT-2014(Jab)], overseas vendors provided installation and commissioning activities in connection with machinery/equipment supplied by them to the Taxpayer. The Tribunal held that such activities did not create an installation PE, since the activities did not exceed the threshold provided in the Double Taxation Avoidance Agreements (DTAAs). The Tribunal also held that in a situation where there is a specific PE clause in relation to a particular type of service and such services are also covered by the scope of FTS/Fees for included services (FIS) provision, the taxability of consideration for such services must remain confined to the relevant specific PE clause. Hence, the payment towards installation and commissioning activities made to foreign vendors will not be taxable in India and the Taxpayer is under no obligation to withhold taxes on such payments, under the ITL.

(For more details, please refer EY Alert dated 9 January 2015)

Service PE created by activities of employees deputed to India, not taxable as FIS

The Mumbai Tribunal, in case of Morgan Stanley International Inc., v. DDIT [TS-775-ITAT-2014], held that the employees deputed to India were “real” employees of the Taxpayer who were rendering services in India on behalf of the Taxpayer and such employees created a Service PE in India under the India-US DTAA. Once a Service PE is created, the provisions of taxing income as FIS under the India-US DTAA will not apply. Payments made by Indian companies for services rendered by such employees will be taxable as business income of the Taxpayer according to the provisions of the India-US DTAA.

(For more details, please refer EY Alert dated 14 January 2015)

Indian subsidiary carrying out outsourced functions of Swiss re-insurance company does not create a PE

In the case of Swiss Re-Insurance Company Ltd. v. DDIT (Int. Tax) [TS-55-ITAT-2015(Mum)], the Taxpayer’s wholly-owned Indian subsidiary (ICo) was engaged in carrying out risk assessment services, marketing insurance and providing administrative support for the Taxpayer in India. The ITAT ruled that ICo did not create a service PE of the Swiss entity in India according to the DTAA. The ITAT observed that the employees of ICo rendered their services to ICo and there was nothing on record to prove that they had rendered services to the Taxpayer or that the Taxpayer had paid their salaries. Moreover, reinsurance is specifically excluded from the ambit of the PE definition under the DTAA.

The ITAT also ruled that such an arrangement did not create a “business connection” in India under the ITL since none of the conditions prescribed therein, i.e., habitually concluding contract, maintenance of stock and securing orders, had been satisfied in the given case.

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15 Tax Digest

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

Citation Particulars Ruling of HC

CIT v. Devasan Investment Pvt. Ltd.

[TS-708-SC-2014]

Tax Authority preferred an SLP against Delhi HC’s ruling holding gain from share trading as capital gain despite short duration of holding

• The Taxpayer offered income from share trading as capital gains.

• The Tax Authority, observing the short duration of holding of securities, sought to tax the income as business income.

• The HC held that nature of transaction has to be decided considering all facts of the case. The HC noted that the Taxpayer kept a “target” price and it would hold the shares till such target price was achieved, which incidentally happened to be within a short duration of one or two months.

• Therefore, based on an overall consideration of factors, the HC concluded that the nature of the transaction was essentially investment activity, notwithstanding that the purchase and sale took place within a short interval.

M.J. Siwani & Ors. v. CIT

[TS-709-SC-2014]

Taxpayer preferred an SLP against Karnataka HC’s ruling denying capital gain exemption to the taxpayer owning more than one house as joint owner, at the time of transfer of land

• The HC held that Taxpayer was not eligible for exemption from capital gains because the condition of owning not more than one house at the time of sale of capital asset was not satisfied.

• The HC observed that co-owner is as good as owner and he is owner of the entire house till it is partitioned. Since the taxpayer co-owned more than one residential house at the time of sale of land, he was not eligible to claim exemption from capital gain on investment of sale proceeds in the residential house.

Shahrooq Ali Khan v. CIT & Anr.

[TS-746-SC-2014]

Taxpayer preferred an SLP against Karnataka HC’s ruling that Taxpayer being mere facilitator for transfer of property from owner to the end buyer, income from sale of such property was business income in the hands of Taxpayer

• The Taxpayer merely acted as a facilitator to find a buyer for the sale of property.

• The Taxpayer did not intend to invest in the property or own it but to resell it on finding a suitable buyer.

• Hence, the activity was an “adventure” in the nature of trade.

CIT v. V S Lad & Sons

[TS-807-SC-2014]

Tax Authority preferred an SLP against Karnataka HC’s ruling deleting concealment penalty

The HC laid down following principles for levy of concealment penalty

• Mens rea is not a pre-condition for levy of penalty on breach of civil liability.

• There has to be a “satisfaction” on the part of the Tax Authority in the course of the proceedings that there is concealment/ furnishing of inaccurate particulars.

• Addition to returned income during assessment

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16 Tax Digest

Citation Particulars Ruling of HC

CIT v. Vinay Sharma

[TS-757-SC-2014]

Tax Authority preferred an SLP against Delhi HC’s ruling deleting penalty on income voluntarily surrendered by Taxpayer

• The Taxpayer made substantial payments to farmers in cash, which were not verifiable.

• HC observed that the Taxpayer produced all the relevant material such as books of accounts, audit reports, vouchers etc. Moreover, the income voluntarily surrendered by the Taxpayer was not objected to by the Tax Authority.

• HC deleted the concealment penalty on income surrendered by the Taxpayer voluntarily due to unavailability of data with condition of non levy of penalty and to buy peace.

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17 Tax Digest

Recent decisions on taxation of Royalty/FTS paymentsSummarized below are some decisions on Royalty and FTS, also considering relevant DTAA provisions:

Case law Payment description Ruling

GVK Industries & Anr. v. ITO

[TS-61-SC-2015]

SC

Payment for advice/opinion in connection with raising funds

• SC ruled that success fee charged on fund-raising services by an NR entity is taxable as FTS under the ITL.

• The phrase “FTS” has been defined under the ITL to mean managerial, technical or consultancy services. The term “consultancy” is generally understood to mean an advice/opinion.

• As the NR entity possessed skill, acumen and knowledge to give an advice/opinion, the specialized services fall within the ambit of “consultancy” services and, thus, are FTS in nature.

Marriot International Inc. v. DDIT (Int. Tax.)

[TS-4-ITAT-2015 (Mum)]

Mumbai ITAT

Payments received from various hotels as reimbursement for promoting the brand value of group

• The ITAT observed the arrangement between group companies wherein the first company was owner of the brand, second company was authorized to give license to hotels against royalty charges and third, the taxpayer company, was responsible to promote brand value.

• Tax Authority contented that payment received by Taxpayer company from hotels as reimbursement for undertaking international advertisement and marketing program were in the nature of royalty.

• ITAT upheld Tax Authority’s contention and held that it was a single transaction of royalty, which was segregated into more than one component to spread the income over different companies of the group.

• ITAT proceeded to lift the corporate veil and treat the transaction as one, i.e., payment made by hotels to second company as royalty and payment to Taxpayer company as reimbursement of brand promotion expenditure and tax the same as royalty.

Bennet Coleman & Co. Ltd v. ITO

[TS-684-ITAT-2014(Mum)]

Mumbai ITAT

India Swiss DTAA

Payment made for installation and commissioning of supplied equipment

• The ITAT held that installation and commissioning services qualify as “assembly” and, hence, were excluded from the purview of taxation as FTS under the ITL.

• The ITAT further held that, under the DTAA, the Independent Personal Services article, which overrides the FTS article of the DTAA, applies not only to individuals but also to non-individual taxpayers.

• As the services of installation and commissioning do not meet the threshold requirement under the IPS article, such services cannot be taxed in India. (For more details, please refer EY Alert dated 17 November 2014)

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18 Tax Digest

Case law Payment description Ruling

Finoram Sheets Ltd. v. ITO

[TS-686-ITAT-2014(Pun)]

Pune ITAT

Payment for acquiring know-how in connection with erection of plant, and, for technical and process know how

• The agreement between Taxpayer and Israel company provided for payment for primarily three types of services , i.e., design engineering and plant know-how, commercial services, as well as technical and process know-how.

• Following Himachal Pradesh HC in case of Maggronic Devices Pvt. Ltd. (49 SOT 685), the ITAT held that payment for acquisition of plant know-how connected to erection of plant cannot be considered as “Royalty”.

• ITAT further held that, payment for technical and process know-how are in the nature of “Royalty”.

CIT vs. The Andhra Petrochemicals Ltd.

[TS-697-HC-2014(Tel and AP)]

Telangana and Andhra Pradesh HC

Payment for technical know-how connected to installation of plant and machinery

• Taxpayer made lump sum consideration to a UK company for supply of technical know-how, machinery installation and erection.

• HC ruled that the said payment cannot be considered as royalty. Lump sum payment can be considered as royalty when it relates to a fixed period for which the facility can be utilized. In the given case, transfer of know-how was not on payment of any periodical royalty but was only to the extent necessary for installation.

ACIT v. Bartronics India Ltd.

[TS-712-ITAT-2014(Hyd)]

Hyderabad ITAT

India Singapore DTAA

Payment for right to use smart card source code operating system for transport applications

• The Taxpayer made payments to certain Singapore companies for purchase of certain software on a non-exclusive and non- transferable basis for the Taxpayer to use in respect of its own business.

• ITAT, which has regard to the nature of rights provided for in the license agreement, concluded that the payment was for a readymade off–the-shelf computer program, that was akin to purchase of a product.

• Furthermore, this was meant to be only used internally by the Taxpayer. Therefore, the payment was not for use of or right to use a copyright properly but, rather, for use of a copyrighted article.

• Hence, said payment was held to be business income of Singapore companies and not royalty.

(For more details, please refer EY Alert dated 1 December 2014)

CIT v. Delhi Race Club Ltd.

[TS-713-HC-2014(Del)]

Delhi HC

Payment towards live telecast • The HC, after considering the provisions of the ITL and the Indian Copyright Law (ICL) ruled that payments for live telecast will not fall within the ambit of “copyright”.

• The HC observed that ICL has treated “copyright” and “broadcasting right” as distinct and separate rights, and copyright does not subsist within the ambit of broadcast.

• The HC thus held that, as the royalty definition under the ITL captures payments in the nature of “copyright” per se, and since no copyright subsists in “live” telecast, the payment should not be taxable as royalty.(For more details, please refer EY Alert dated 1 December 2014)

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19 Tax Digest

Case law Payment description Ruling

ITO v. F L Smidth Ltd.

[TS-719-ITAT-2014(Chny)]

Chennai ITAT

India Denmark DTAA r/w. s.9(1)(vi) of ITL

Payment for shrink wrap software license reimbursed to group company under a cost sharing arrangement

• The Taxpayer made payment to its group entity under a cost sharing arrangement towards purchase of various software licenses such as the standardized Microsoft office software application.

• ITAT ruled that granting of any “license” amounts to “royalty” under S.9(1)(vi) of ITL even in absence of any rights granted to the licensee to commercially exploit the copyright.

• Accordingly the ITAT regarded the impugned payment for “license” to use a shrink wrap software as royalty, following the Karnataka HC rulings in case of Samsung Electronics Co. Ltd. (ctn)and Synopsis International Old Ltd. (ctn)

Vodafone South Ltd. vs DDIT (Int.Tax)

[TS-789-ITAT-2014(Bang)]

Bangalore ITAT

Payment for interconnect charges and bandwidth

• Taxpayer made payments to NR telecom service providers towards interconnect charges, and capacity transfer for provision of bandwidth.

• The ITAT, following the decision of the Madras HC, in the case of Verizon Singapore Pte. Ltd. {39 taxman.com 70} ruled that payments for interconnect or bandwidth is taxable as “process royalty” under the ITL as also the DTAA.

• Further, “process royalty” under the DTAA includes any process, i.e., whether secret or not.

iGATE Computer Systems Ltd. vs. DCIT

[TS-798-ITAT-2014(Pune)]

Pune ITAT

Payment for interconnect charges • Taxpayer made payments for interconnect charges to various telecom service providers.

• The ITAT ruled that provision of interconnect facility is a standard facility, and further, in the absence of “human intervention,” the payment is not taxable as FTS.

• The Pune ITAT also clarified that “human intervention” for a limited purpose such as maintenance of the equipment cannot be regarded as a technical service, and thus, outside the ambit of FTS.

HCL Ltd v. CIT

[TS-45-HC-2015(Del)]

Delhi HC

India Germany DTAA

Lumpsum payment for five years under “Technology Transfer and Technical Assistance Agreement”

• Referring to the agreement entered into by the Taxpayer and foreign company (F Co), the HC observed that FCo has not alienated its rights in the Intellectual Property Rights (IPR). What taxpayer has received is mere non-exclusive right to use the technology, trade name etc. for specified period.

• HC took note of factors such as no absolute/complete transfer of IPR from FCo to Taxpayer, rights were non-exclusive and restricted to specified and listed licensed property, obligation of Taxpayer to maintain confidentiality of the technology to conclude that there was no transfer of ownership in the IPR but only a case of right or permission to use the IPR.

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20 Tax Digest

Case law Payment description Ruling

Sandvik AB v. DIT

[TS-738-ITAT-2014(Pun)]

Pune ITAT

India – Sweden DTAA

Receipt for rendering of commercial managerial services

• The ITAT held that services rendered by Taxpayer could not be regarded as FTS as the same do not make available technical knowledge/skill to Indian Co in India.

• India-Sweden DTAA incorporates MFN clause, according to which, if under any DTAA, India limits its taxation at source on FTS to a rate lower or a scope more restricted than the rate or scope in the India-Sweden DTAA, the same rate or scope shall apply under the India-Sweden DTAA also.

• India-Portugal DTAA provides a restricted definition of FTS, wherein services can be regarded to fall within the scope of FTS only if the same makes available technical knowledge, skill etc., which is not so in the given case.

(For more details, please refer EY Alert dated 19 February 2015)

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21 Tax Digest

From the Tax Gatherer’s Desk

Government of India notifies class of resident taxpayers eligible to seek Advance Ruling

The GoI issued a Notification, notifying class of resident taxpayers who can seek ruling from Authority for Advance Rulings (AAR). Prior to amendment by Finance (No.2) Act 2014 (FA 2014), the facility of seeking advance ruling was available to (a) NRs (b) residents undertaking transaction with NRs in relation to NRs’ tax liabilities and (c) residents being Public Sector Undertakings (PSU) in respect of an issue relating to the computation of total income pending before any Tax Authority or Appellate Tribunal.

With a view to reduce litigation, FA 2014 extended facility of advance ruling to all resident taxpayers falling within such class or category as GoI may notify. Accordingly, the GoI has specified a category of residents, who in relation to their tax liability arising out of one or more transactions valuing INR1 billion(INR100 crores) or more in total, which has been undertaken or proposed to be undertaken, can seek advance ruling.

(Source: Notification No. 73/2014 dated 28 November 2014)

(Refer EY Alert dated 1 December 2014)

High Level Committee constituted to interact with trade and industry and to bring in clarity on tax laws

As promised by the Finance Minister, in his Budget Speech for 2014–15, a High Level Committee (HLC) has been set up with the objective of restoring investor confidence and to provide a stable and predictable taxation regime. The HLC will interact with trade and industry and ascertain areas where clarity on tax laws is required. The HLC will then give recommendations to the CBDT/Central Board of Excise and Customs (CBEC) which are, thereafter, obliged to provide necessary clarifications, circulars etc., within two months from the date of the HLC’s recommendations.

(Source: Press Note dated 3 December 2014)

(Refer EY Alert dated 5 December 2014)

CBDT releases revised draft of Income Computation and Disclosure Standards for public comments

The CBDT has released a revised draft of Income Computation and Disclosure Standards (ICDS) on 9 January 2015, subsequent to an earlier draft of October 2012. The ITL empowers the GoI to notify ICDS to be followed by any class of taxpayers or in respect of any class of income. In view of significant developments in the convergence to International Financial Reporting Standards (IFRS), the GoI constituted a Committee in December 2010, comprising officials of the Tax Authority and professionals. The terms of reference of the Committee were to study harmonization of accounting standards issued by the Institute of Chartered Accountants of India (ICAI AS) with the ITL and to suggest accounting standards for tax compliance under the ITL and also to deal with the issue of the tax impact of convergence to IFRS.

The Committee recommended notification of 18 standards for compliance with the ITL on the issue of harmonization of ICAI AS with the ITL and also provided drafts of 14 standards, which were released for public comments by the CBDT in October 2012. After examining suggestions received from stake holders, the CBDT has released revised drafts of 12 ICDS.

(Source: Press Release dated 9 January 2015)

(Refer EY Alert dated 16 January 2015)

CBDT clarifies no interest levy for delay in furnishing tax return if tax is paid before due date for filing tax return

The CBDT issued a Circular on levy of interest for delay in furnishing of return of income (ROI). The ITL provides for levy of interest for delay in furnishing ROI beyond specified due date. Interest is levied on the amount of outstanding tax due after considering taxes paid during the tax year by way of advance tax, withholding tax, foreign tax credit etc. However, express language of the provision does not reckon credit of taxes paid during the period between end of tax year and due date of filing ROI (known as “self - assessment tax” or SA Tax).

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22 Tax Digest

In 2008, the SC in the case of CIT v. Pranoy Roy & Anr [309 ITR 231] had held that no interest can be levied for delay in furnishing ROI where SA Tax is paid before due date of filing ROI. After more than six years, the CBDT reviewed the prevalent practice of levy of interest and clarified that no interest should be levied for SA Tax paid before the due date of filing ROI in line with the SC ruling.

(Source: Circular No. 2/2015 [F.NO.385/03/2015-IT(B)], dated 10 February 2015)

(Refer EY Alert dated 11 February 2015)

Indian administration clarifies on the quantum of disallowance for failure to withhold taxes at source on payments to an NR

Under the ITL, withholding (WHT) provisions impose an obligation on any person responsible for paying (payer) to a NR any interest or any other sum chargeable to tax in India, to withhold taxes therefrom at the rates in force.

In a situation where the payer is of the view that a part of the entire amount paid to the NR alone is chargeable to tax under the ITL, such payer or the NR may make an application to the Tax Authority to determine the appropriate portion of such sum that is so chargeable to tax.

The CBDT has issued a Circular on the quantum of disallowance of “other sum chargeable”, if the payer makes default in complying with the WHT provisions. The Circular clarifies that the quantum of disallowance of “other sum chargeable” is not the gross payment, but that appropriate portion representing “sum chargeable tax”.

(Source: Circular 3/2015 dated 12 February 2015)

(Refer EY Alert dated 13 February 2015)

Shift in focus of the Tax Authority from civil consequences to criminal consequences in serious cases of tax evasion

Willful attempt to evade tax is a serious offence punishable under the ITL with imprisonment up to seven years and fine. The focus of investigation by the Tax Authority had so far been on civil consequences, i.e., revenue augmentation. The Press Release states that in its crusade against black money and with a view to have credible deterrence against generation of black money, the GoI has shifted the focus to successfully prosecute the offenders in shortest possible time.

(Source: Press Release dated 12 February 2015)

Furthermore, any default in remittance of taxes withheld or collected at source within prescribed timelines, is liable for prosecution under the ITL, which could result in rigorous imprisonment up to a period of seven years. The CBDT has now issued Standard Operating Procedures (“SOPs”) for prosecution in cases of delay or default in remittance of such taxes by setting out, inter alia, the procedure for identification of cases and launching of prosecution, the timelines for completing the entire process and roles of Tax Authority in prosecution and compounding of cases.

(Source: Press Release dated 6 January 2015)

CBDT issues guidelines for compounding of offences under the ITL

The ITL provides for compounding of offences, either before or after institution of prosecution proceedings by the specified Tax Authorities. The CBDT has issued a letter which lays down guidelines regulating the compounding of offences under various provisions of ITL. The letter deals with offences, which can and those which cannot be compounded and the procedure to be followed by the Tax Authority for compounding along with fees payable by the Taxpayer for compounding various offences.

(Source: Letter [F.NO.285/35/2013 IT (INV.V)/108, dated 23 December 2014)

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23 Tax Digest

Finance Bill 2015 presented

The Finance Bill, 2015 was presented by the Finance Minister on 28 February 2015.

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

Links to our EY budget Booklet, various EY sector wise alerts:

1. International tax provisions

2. Retail & Consumer products

3. Auto Sector

4. Infrastructure

5. Real Estate

6. Financial Services

7. Technology

8. Media & Entertainment

9. Life Sciences

10. Chemical

11. Budget Booklet

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24 Tax Digest

Happenings across the border

UK announces new Diverted Profits Tax

A key UK development related to the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative is an anti-avoidance proposal for a new Diverted Profits Tax (DPT) at 25% from April 2015. The provision will apply to profits generated by multinationals from economic activity in the UK but artificially shifted out of the UK. Depending on how it is introduced, it may provide a template that other jurisdictions will follow. The rules are intentionally broad based and have novel compliance and charging provisions that may drive small restructurings and improved transparency for a wide range of companies in addition to those groups where an incremental charge is likely to arise.

(For more details, please click here to access EY Alert dated 5 December 2014 UK announces new Diverted Profits Tax in Autumn Statement)

(For more details, please click here to access EY Alert dated 11 December 2014 UK releases details regarding Diverted Profits Tax)

China issues administrative guidance on general anti-avoidance rules (GAAR)

On 2 December 2014, China’s State Administration of Taxation (SAT) issued administrative guidance on GAAR. The Guidance specifies that the main characteristics of tax avoidance arrangements are that the sole purpose or main purpose is “to obtain tax benefits” and the form of the arrangements, but not their economic substance, complies with tax laws. The Guidance does not cover arrangements not related to cross-border transactions or payments and illegal tax transactions, such as tax evasion, fraud and non-payment of required taxes. The Guidance will apply to the tax avoidance arrangements carried out on or after 1 February 2015 and to cases that are not settled by 31 January 2015.

(For more details, please click here to access EY Alert dated 22 December 2014)

China issues circular to encourage corporate restructuring

China’s Ministry of Finance and the State Administration of Taxation (SAT) have jointly issued Circular Caishui [2014] No. 109 (Circular 109) to relax and clarify corporate income tax treatment on certain equity and assets acquisition. The Circular provides for reduction of acquired equity or assets threshold for tax deferral treatment and tax deferral on business restructuring of Chinese tax resident companies. Circular 109 is effective retroactively as of 1 January 2014 and applies to transfers that are still pending.

(For more details, please click here to access EY Alert dated 21 January 2015)

Thailand approves tax incentives for international headquarters and international trading centers

On 23 December 2014, the Thailand Cabinet approved various tax incentives to promote the establishment of an international headquarters (IHQ) and an international trading center (ITC) in Thailand. A Thai incorporated company qualifying for the IHQ incentives will be entitled to a corporate income tax (CIT) exemption on qualified service income received from overseas associated enterprises or branch and sales income from out-out transactions, and a reduced CIT rate of 10% on the qualified income received from an associated enterprise in Thailand and sale income from in-out transactions. Additionally, a withholding tax on dividend and interest paid to an overseas entity will be exempt.

(For more details, please click here to access EY Alert dated 3 February 2015)

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25 Tax Digest

New minimum tax on foreign earnings and one-time tax on accumulated foreign earnings featured in US Administration’s fiscal year 2016 Budget

On 2 February 2015, the Obama administration (Administration) released its fiscal year 2016 budget proposals ( FY16 Budget ). The revenue proposals in the Administration’s FY16 Budget include new international tax proposals that would impose a 19% minimum tax on foreign income, impose a one-time 14% tax on previously untaxed foreign income, repeal delay in the implementation of worldwide interest allocation, permanently extend the look-through treatment of payments between related controlled foreign corporations (CFCs) and amend the CFC attribution rules.

(For more details, please click here to access EY Alert dated 5 February 2015)

China issues indirect transfer rule replacing existing Circular

On 6 February 2015, China’s SAT released SAT Announcement [2015] No. 7 to replace existing Circular Guoshuihan [2009] No. 698 (Circular 698). The Announcement reflects SAT’s improved focus on indirect transfers after more than five years of experience in administering indirect transfer transactions. In addition to the indirect transfer of equity interest, Announcement 7 includes language to cover indirect transfers of real properties, properties owned by an “establishment or place” and “rights and interest” similar to equity interest. Although Announcement 7 becomes effective as of 3 February 2015, it is also applicable to transactions that took place prior to the effective date but not yet concluded by tax bureaus.

(For more details, please click here to access EY Alert dated 9 February 2015)

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26 Tax Digest

Treaty/OECD Updates

Treaty Updates

Protocol amending India-South Africa DTAA enters into force

The Protocol amending the India-South Africa DTAA was signed on 26 July 2013. The GoI has notified the Protocol to be effective from 26 November 2014. The Protocol provides for strict compliance of Exchange of Information (EoI) between the two countries.

(Source: Notification No.10/2015-FT&TR-II [F.NO.500/144/2005-FTD-II], dated 2 February 2015)

OECD BEPS updates

OECD releases Discussion Draft on use of profit split method in global value chains under BEPS Action 10

On 16 December 2014, the OECD released a Discussion Draft in connection with Action 10 (transfer pricing for other high risk transactions) under its Action Plan on BEPS. The document titled BEPS Action 10: Discussion Draft on the Use of Profit Splits in the Context of Global Value Chains ( Discussion Draft ) addresses nine scenarios where in the OECD’s view it may be more difficult to apply one-sided transfer pricing methods to determine transfer pricing outcomes that are in line with value creation and application of a transactional profit split method may be appropriate.

(For more details, please click here to access EY Alert dated 18 December 2014)

OECD releases Discussion Draft on more effective dispute resolution mechanisms under BEPS Action 14

On 18 December 2014, OECD released a Discussion Draft in connection with Action 14 on the effectiveness of dispute resolution mechanisms under its Action Plan on BEPS. The document, BEPS Action 14: Make Dispute Resolution Mechanisms More Effective (t Discussion Draft or Draft), anticipates that treaty-based disputes will increase as a result of the work on BEPS and reaffirms the OECD’s commitment to ensure certainty and predictability for business by improving the effectiveness of the Mutual Agreement Procedure (MAP). The Draft does not represent consensus views of the OECD’s Committee on Fiscal Affairs

or its subsidiary bodies. In particular, the Draft underscores the lack of consensus on the appropriateness of mandatory binding arbitration as a tool to increase the effectiveness of the MAP.

(For more details, please click here to access EY Alert dated 22 December 2014)

OECD releases Discussion Draft on cross-border commodity transactions under BEPS Action 10

On 16 December 2014, the OECD released a Discussion Draft in connection with Action 10 on transfer pricing for other high risk transactions under its Action Plan on BEPS. The document BEPS Action 10: Discussion Draft on the Transfer Pricing Aspects of Cross-Border Commodity Transactions ( Discussion Draft or Draft) proposes additional guidance in Chapter II of the OECD Transfer Pricing Guidelines addressing cross-border commodity transactions. Specifically, the Draft states that the aim of the proposed guidance is to ensure that pricing of commodity transactions reflects value creation, thereby protecting the tax base of commodity dependent countries.

(For more details, please click here to access EY Alert dated 22 December 2014)

OECD releases Discussion Draft on interest deductions under BEPS Action 4

On 18 December 2014, the OECD released a Discussion Draft under its Action Plan on BEPS. The document, BEPS Action 4: Interest Deductions and Other Financial Payments ( Discussion Draft or Draft), sets forth several alternative approaches to limiting deductions for interest expense. The principal approaches discussed are: (1) a group-wide rule, which would limit a company’s net interest deductions to a proportion of the group’s actual net third party interest expense; (2) a fixed ratio rule, which would limit a company’s interest deductions to an amount determined by applying a fixed benchmark ratio to an entity’s earnings, assets or equity; and (3) certain combinations of these two approaches. The Draft also discusses the use of more targeted approaches. The Discussion Draft identifies benefits and drawbacks of approaches considered, as well as key questions raised by each approach.

(For more details, please click here to access EY Alert dated 23 December 2014)

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27 Tax Digest

OECD releases Discussion Draft under BEPS Actions 8-10 on risk, re-characterization, and special measures

On 19 December 2014, the OECD released a Discussion Draft in connection with Actions 8-10 (Assure that transfer pricing outcomes are in line with value creation) under its Action Plan on BEPS. The document titled BEPS Actions 8, 9 and 10: Discussion draft on revisions to Chapter I of the Transfer Pricing Guidelines (including risk, re-characterization and special measures) ( discussion draft or draft) consists of two parts. Part I is a proposed revision to Section D of Chapter I of the OECD Transfer Pricing Guidelines. The proposals emphasize the importance of accurately delineating the actual transactions. This part of the draft contains guidance on the relevance and allocation of risk and also guidance on re-characterization or non-recognition, including criteria for determining when it would be appropriate for the actual transaction not to be recognized. Part II of the Draft sets out five options for potential special measures in connection with intangible assets, risk and over-capitalization.

(For more details, please click here to access EY Alert dated 24 December 2014)

OECD explains agreed approach on intangible property regimes under BEPS Action 5

On 6 February 2015, the OECD released a trio of papers that address three of the focus areas in its Action Plan on BEPS. One of the documents, titled Action 5: Agreement on Modified Nexus Approach for IP Regimes (the Action 5 Paper), describes the consensus on the approach for a substantial activity requirement for intangible property (IP) regimes such as patent boxes in connection with BEPS Action 5 (harmful tax practices). The agreed approach builds on the “modified nexus approach” developed jointly by the German and UK governments. The Action 5 Paper describes conceptual issues with respect to the modified nexus approach and additional work that will be done in order to allow agreement on the detailed rules to be reached in 2015.

(For more details, please click here to access EY Alert dated 9 February 2015)

OECD issues mandate for negotiation of multilateral instrument under BEPS Action 15

On 6 February 2015, the OECD released a document, titled Action 15: A Mandate for the Development of a Multilateral Instrument on Tax Treaty Measures to Tackle BEPS, which includes the mandate ( Mandate), agreed upon by the OECD and G20 countries, with respect to the process of developing the multilateral instrument contemplated under Action 15. The Mandate authorizes the establishment of an ad hoc group ( Group) to conduct work on a multilateral instrument that will solely implement BEPS measures that take the form of recommended tax treaty provisions. The Group is to have its first meeting no later than July 2015 and is to aim to have the multilateral instrument ready to open for signature by year-end 2016.

(For more details, please click here to access EY Alert dated 9 February 2015)

OECD issues implementation guidelines for country-by-country reporting under BEPS Action 13

On 6 February 2015, the OECD released a document, titled Action 13: Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting ( Guidance), which provides the much-anticipated guidance on implementation of the country-by-country report (CbC Report) that is part of the three-tier transfer pricing documentation approach developed under BEPS Action 13. The Guidance provides for the first CbC Reports to be filed covering 2016 fiscal years. The Guidance further provides for CbC Reports generally to be filed in the home country of a multinational corporation (MNC) group’s parent company and shared with other relevant countries under government information exchange mechanisms. The Guidance also addresses other implementation matters related to the CbC Report. In addition, the Guidance includes some high-level information regarding implementation of the master file and local file elements of the transfer pricing documentation.

(For more details, please click here to access EY Alert dated 9 February 2015)

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28 Tax Digest

Case Laws

Indirect TaxService tax

Supreme Court, Larger Bench

Ancillary and incidental activities of pouring, pumping and laying of concrete during supply of Ready Mix Concrete is not a taxable service.

Finance Act, 1994; in favor of assessee

The assessee was primarily engaged in preparation of ready mix concrete (RMC) at a project site. The Tribunal rejected the Revenue’s contention that while carrying out the dominant objects, other ancillary and incidental activities of pouring, pumping and laying of RMC during delivery at site were taxable services. The Tribunal’s order [2011-VIL-26-CESTAT-DEL-ST] observed that Service Tax is not leviable on such ancillary and incidental activities, as the assessee was involved in supply of RMC and that, prima facie, it was a sales contract and not a service contract. Thereafter, the Revenue’s appeal before the Delhi HC [ 2014 (34) STR 3 (Del)] was dismissed on the ground that such an issue was not maintainable before the forum. Being aggrieved, the Revenue had approached the Larger Bench of the SC. The Hon’ble SC found that the Revenue’s appeal was devoid of any merit and accordingly dismissed it.

Commissioner of Service Tax v. GMK Concrete Mixing Pvt. Ltd.; 2015-VIL-01-SC-ST-LB

Supreme Court, Larger Bench

Consideration paid for production of audio-visual coverage of cricket matches held liable to Service Tax under reverse charge mechanism

Finance Act, 1994; in favor of revenue

The assessee entered agreements with various overseas companies, which produced audio-visual coverage of cricket matches. The issue that arose before the Tribunal [ 2014-TIOL-1774-CESTAT-MUM] was whether such aforesaid activity would come within the definition of “programme producer’s services.” The Revenue contended that the aforesaid services received by the assessee fell

within the purview of “programme producer’s services” and consequently, tax was demanded on a reverse charge basis under Section 66A of the Finance Act, 1994 on the consideration paid by them to such overseas production companies. It was noted that digitalized images of the cricket coverage were uploaded for broadcasting cricket match viewers all over the world. Placing reliance on the terms of the agreements, the Tribunal observed that non-resident service providers were producing a program for and on behalf of the assessees. The Tribunal found merit in the Revenue’s classification of the aforesaid services under “programme producer’s services” and held that the assessee was liable to pay Service Tax along with interest on the consideration paid for services received. The Tribunal confirmed that the assessee had suppressed material facts from the Revenue and invoked the extended period of time for confirming Service Tax demand along with interest and penalty. Being aggrieved, the assessee had approached the Supreme Court (SC). Dismissing the assessees’ appeal, placing reliance on the Tribunal’s decision, the Hon’ble larger bench of the SC found no infirmity in the order.

Board of Control for Cricket in India v. Commissioner of Service Tax; 2015-TIOL-04-SC-ST

Supreme Court, Larger Bench

Maintenance or repairs of any “part” of “Motor vehicle” excluded from the scope of Management, Maintenance or Repair Services

Finance Act, 1994; in favor of assessee

The assessee is engaged in the business of reconditioning engines and parts thereof and repairs of other parts of vehicles of all brands. The assessee contended that reconditioning/repairing works on vehicle engines or parts thereof or on other parts of vehicles were to be treated as repairs/maintenance of “Motor vehicles” and the activity was excluded from taxability, in terms of sub-clause ii (c) in the definition under Section 65(64) of the Finance Act, 1994 for Management, Maintenance or Repair Service (MMRS). The Revenue sought to levy Service Tax under MMRS, contending that the activities undertaken by the assessee did not amount to repairs/reconditioning of

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29 Tax Digest

“Motor vehicles” and the aided activities only involved repairs/reconditioning of vehicles’ IC engine and other parts, which were only “equipment/goods,” and therefore such activities could not be excluded from levy of Service Tax under the MMRS category (i.e., the sub-clause would not be applicable). Further, the extended period of limitation was invoked, as suppression on part of the assessee was alleged.

The Tribunal’s order [2012-TIOL-1289-CESTAT-BANG] observed that in respect of vehicles brought to the assessee’s premises, such an activity would amount to maintenance or repair of “Motor vehicles.” However, if the engine or any other part is brought in a knocked-down condition for repair/ maintenance/reconditioning etc., the assessee was not entitled for any exemption from taxability under MMRS. IC engines and parts of motor vehicles were held to be not “Motor vehicles” per se, as they were held to qualify as “Goods or Equipment”, instead. Thus, maintenance or repair of such IC Engines and parts was held to be not “maintenance or repair of Motor vehicles” and was made liable to Service Tax. Further, the Tribunal had held that as there was suppression on the part of the assessee, invocation of an extended period and levy of penalty under Section 78 was valid. Being aggrieved, the assessee approached the Kerala HC [ 2014-TIOL-825-HC-KERALA-ST] wherein the following questions were framed:

Whether the activity undertaken by the assessee was liable to Service Tax or excluded from the scope of Section 65(64)? Whether extended period could be invoked?

The HC held that the aforesaid services were not liable to Service Tax since there was no need that the vehicle must be brought to the workshop for repairs. Further, repair of part of the vehicle brought to the workshop also would be excluded from the MMRS category. The word “exclusion” clearly indicated an act of preventing it from entering a place or taking part in something. The HC observed that in tax parlance it is an item of income excluded from gross income. When the statute clearly intended to exclude “Motor vehicle,” it would be apparent that it excluded “parts of the motor vehicle” as well. If such an interpretation is not given, the very purpose of such an exclusion would be rendered ineffective. Although the extended period was invoked, penalty was held to be not

leviable as the HC held that there was a bona fide dispute regarding taxability and there was no deliberate attempt to evade tax by the assessee. The Revenue, being aggrieved, had approached the SC. The Hon’ble larger bench of the SC dismissed the Revenue’s case, thus upholding the HC’s ruling. Consequently, non-authorized service/maintenance centers or workshops doing maintenance or repairs of any “part” of a “motor vehicle” were excluded from the scope of the MMRS category, and consequently, not liable to Service Tax.

CCE, C & ST v. Kuttukaran Trading Ventures; 2015-TIOL-05-SC-ST-LB

Supreme Court, Larger Bench

SC stays operation of HC order that had struck down Rule 5A(2) of Service Tax Rules, 1994

Finance Act, 1994 and Service Tax Rules, 1994; in favor of revenue

The assessee had filed a petition before the HC challenging the validity of Rule 5A(2) of the Service Tax Rules, 1994 (STR) and CBEC’s Instruction [F. No. 137/26/2007-CX dated 1 January 2008] (instruction), in terms of which the assessee could be directed, on demand, to furnish certain prescribed records. The Revenue before the HC had justified calling of records for “general audit” placing reliance on Rule 5A(2) of the STR, the said instruction issued by CBEC and the Service Tax Manual. The HC observed that the said rule was not within the rule-making powers conferred on the executive under Section 94 of the Finance Act, 1994 and that only Section 72A of the Finance Act, 1994 had substantive powers that prescribed specified circumstances when authorities could order “special audit.” Thus, the HC had affirmed the assessee’s contention and quashed [Rule 5A(2) and said instruction] and held these as ultra-vires. The Revenue, being aggrieved by the HC’s order, had approached the SC . The Hon’ble larger bench of the SC stayed the operation of the HC’s order that had struck down Rule 5A(2) of STR and the said instruction.

Union of India & Others v. Travelite (India); [2014-TIOL-101-SC-ST-LB]

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Supreme Court

Sponsorship services received in relation to sports events would not attract Service Tax.

Finance Act, 1994; in favor of assessee

The assessee had received sponsorship services from the Board of Control for Cricket in India (BCCI) for the Indian Premier League (IPL) cricket matches. The Revenue stated that the same did not constitute sponsorship of sports events as:

a) The IPL, according to it, it was a league match and should not be comprehended within the expression “sports events.”

b) There was a commercial element involved in IPL matches.

c) IPL tournaments are in any event not sports events. The Revenue thus contended that Service Tax was not paid on such services and demanded interest along with penalty.

Being aggrieved, the assessee approached the Tribunal, which placed reliance on a Tribunal’s decision in Hero Honda Motors Ltd. [ 2013-TIOL-871-CESTAT-DEL] and held that the charging provision clearly excludes such sponsorship in relation to sports events from chargeability of Service Tax. The Tribunal [ 2014-TIOL-1284-CESTAT-MUM] set aside the Revenue’s order, quashing the demand for Service Tax, interest and penalty. The Revenue filed an appeal before the SC against the Tribunal’s decision. The Hon’ble SC found no merit in the Revenue’s appeal and dismissed it, thus holding that the sponsorship services received in relation to sports events would not attract Service Tax.

Commissioner of Service Tax v. Citibank NA; 2015-TIOL-09-SC-ST

High Court, Madras

Refund of Service Tax paid on Goods Transport Operator service disallowed (during the period 1997 to 1999) vide the SC’s decision in Gujarat Ambuja

Finance Act, 1994; in favor of revenue

The assessee’s refund claim of Service Tax, paid under protest, was rejected by the Tribunal, based on the SC’s

decision in Gujarat Ambuja Cements Ltd. v. Union of India [ 2006 (3) STR 608]. The Tribunal held that it is of “no avail for the assessee to pay tax under protest” as returns were filed in accordance with the statutory provisions and such payment of tax was deemed to be considered as voluntary payment of tax. Being aggrieved by the Tribunal’s decision, the assessee approached the HC.

The Hon’ble HC held that from the decision of the SC in the case of Gujarat Ambuja (supra), it was clear that the users of the service rendered by the Goods Transport Operators were liable to pay Service Tax. Further, due to the fact that the assessee had already paid the Service Tax, it was held that the question of refund of such tax did not arise, and thus, it was held that the assessee was not entitled to a refund. Thus, the HC confirming the Revenue’s contention, declined grant of refund and observed that the Tribunal’s decision was justified.

E I D Parry India Ltd v. CESTAT;[ 2015-TIOL-289-HC- MAD-ST]

High Court, Karnataka

Merely because Service Tax was paid prior to issuance of show cause notice (SCN), the assessee was not exonerated from penalty under Section 78.

Finance Act, 1994; in favor of revenue

Before the Tribunal, the assessee had contended that no penalty was imposable on it under Sections 76 to 78 of the Finance Act, 1994, mainly on the grounds that (i) it had no intent to evade payment of Service Tax, (ii) its non-filing of returns and non-payment of Service Tax was merely on account of a bona fide mistake and (iii) the entire amount of Service Tax had been paid prior to issue of the SCN. However, the Tribunal [(2013) 34 taxmann.com 117 (Bangalore - CESTAT)] rejected the assessee’s reliance on the aforesaid contentions.

Being aggrieved, the assessee approached the HC. However, the HC, affirming the Tribunal’s order, held that the assessee did not provide any explanation as to the “so called bona fide mistake.” Further, the HC placed reliance on the SC’s decision in the case of Union of India v. Rajasthan Spinning and Weaving Mills; [2009-TIOL-63-SC], wherein, it is held that any payment of duty in question (whether before or after the SCN was issued), would not

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alter the penal liability under Section 11AC of the Central Excise Act, 1944. Thus, Section 11 AC of the Excise Act, 1944 was held to be pari materia with Section 78 of the Finance Act, 1994. Consequently, the Hon’ble HC ruled against the assessee, stating that it was not exonerated from penalty, merely because Service Tax was paid prior to the issuance of the SCN.

K Madhav Kamath Brothers And Co v. ACCE; [2015-TIOL-154-HC-KAR-ST]

High Court, Gujarat

Services provided by clubs to its members held not liable to Service Tax prior to introduction of negative list of services

Finance Act, 1994; in favor of assessee

The Revenue demanded Service Tax from the assessee (a club) for services provided by it to its members under Section 65(25aa) read with Section 66 of the Finance Act, 1994 (i.e., Club or Association’s Services) during the period, 16 June 2005 to 30 June 2012. The assessee had not registered itself as a service provider, as it believed that its services were not liable to Service Tax in view of the principle of mutuality. The Tribunal, relying on the HC’s decision in Sports Club of Gujarat Ltd. v. Union of India [2013 (31) STR 645 (Guj)], ruled in favor of the assessee.

Being aggrieved, the Revenue filed an appeal before the Gujarat HC and argued that the Tribunal had rendered the aforesaid decision without even analyzing facts and conclusion, based on the fact that the said ruling was under challenge before the SC. The HC held that it was true that the Tribunal’s decision was somewhat brief and it would have been desirable if it had given more elaborate facts in order to apply ratio of decision in Sports Club of Gujarat Ltd. (supra). However, the HC observed that such a fact, in itself, would not permit it to overturn the decision of the Tribunal, when indisputably, the facts were similar. Thus, it was held that in view of the ratio, as laid down in Sports Club of Gujarat Ltd. (supra), the Tribunal was perfectly justified in setting aside the Revenue’s orders.

The Revenue had also argued that the decision in Sports Club of Gujarat Ltd. (supra), declaring certain provisions

of Service Tax law as unconstitutional, would not apply to other assessees. It was held by the HC when a declaration of unconstitutionality is made by a Court, it operates in rem and not in personam; therefore, such an unconstitutional provision would not apply. The Hon’ble HC concluded that it ws bound by the ratio of the decision in Sports Club of Gujarat Ltd. (supra) and mere pendency of further appeal by the Revenue did not prevent it from disposing the said appeals.

Commissioner of Central Excise and Customs v. Surat Tennis Club;[ (2015) 54 taxmann.com 97 (Gujarat)]

High Court, Kerala

The Revenue had raised a notice and the assessee had paid Service Tax under protest, along with a writ petition challenging such a notice. The HC directed the Revenue to complete adjudication and refund Service Tax, if the demand was dropped.

Finance Act, 1994; partly in favor of assessee

The Revenue had issued a notice demanding Service Tax from the assessee, a co-operative society, under Banking and other Financial Services in terms of Section 65(12) of the Finance Act, 1994, read with Article 226 of the Constitution of India. The assessee (i) replied to the notice, (ii) paid Service Tax under protest and (iii) filed a writ petition challenging the notice on the ground that the assessee had not provided any taxable service and that the Revenue had not quantified the Service Tax amount. As discussed, the assessee had paid Service Tax for the period October 2007 to June 2012 under protest, while adjudication was still to be finalized.

The Hon’ble Kerala HC held that in the course of such an adjudication exercise, if the authority arrived at a finding that the assessee was not liable to discharge Service Tax, then the amount already paid under protest by the assessee would be refunded to it in the manner prescribed. The assessee’s writ petitions were accordingly disposed of.

The Kalladikkode Service Co-Operative Bank Ltd v. Union of India; [2015-TIOL-127-HC-KERALA-ST]

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High Court, Kerala

Pre-deposit of 10% reduced; discussion of stay applications and appeals pending before any appellate authority, prior to the commencement of the Finance Act, 2014

Finance Act, 1994; in favor of assessee

The assessee filed an appeal against the order of the Tribunal, which directed it to deposit INR0.8 mllion as pre-deposit, as well as an equal amount as penalty in terms of Section 78 of the Finance Act, 1994. The assessee contended that in terms of the Finance Act, 2014’s provisions (second proviso to Section 35F of Central Excise Act, 1944), it would have to remit only 10% of the duty demanded (i.e., not penalty). In addition, the assessee contended that the Tribunal’s order was too onerous and also pleaded financial hardship, observing that the Tribunal should not have imposed such a condition of pre-deposit of duty and penalty. Thus, the assessee contended that that the Tribunal’s order was illegal and requested for reduction of the pre-deposit.

The Revenue opposed the assessee’s plea for reduction of the amount ordered by the Tribunal by relying on Circular No.984/08/2014-CX, dated 16 September 2014 issued by the CBEC, and stated that as per this circular, the total amount due from the assesse, including the duty payable and penalty, should be taken into account. The Revenue further contended that the provision relied upon by the assessee would not apply to stay applications and appeals pending before any appellate authority prior to the commencement of the Finance Act, 2014, viz. 6 August 2014.

The assessee’s stay application was dated 15 April 2014 and the order passed by the Tribunal was dated 26 August 2014. Therefore, as on 6 August 2014, when the Finance Act, 2014 came into force, the stay application (dated 15 April 2014) was thus pending before the Tribunal, due to which the provisions relied upon by the assessee did not assist it in any manner. The Hon’ble HC of Kerala admitted that though the position, as canvassed by the Revenue was unassailable, but the equal amount also levied as penalty under Section 78 of the Finance Act, 1994, taking into note the totality of the case, was too onerous. Therefore,

the HC reduced the amount to INR0.5 Million, stating that subject to remittance within two weeks, there would be a waiver of the pre-deposit of balance dues and stay of recovery, as ordered by the Tribunal.

K V Raghunathan Pillai v. Commissioner of Central Excise and Service Tax; [2015-TIOL-131-HC-KERALA-ST]

Tribunal, Mumbai

Refund of Service Tax paid, which was never, due held as “deposit”; no limitation under Section 11B of Central Excise Act, 1944

Finance Act, 1994 and Central Excise Act, 1944 (CEA); in favor of assessee

The assessee had entered a works contract and received a mobilization advance. It paid Service Tax on the said mobilization advance under the Works Contract Composition Scheme. The works contract was terminated and the mobilization advance was recovered, as the service was not provided eventually. However, the refund application to procure Service Tax paid by the assessee was rejected on grounds of limitation. TheRevenue contended that the Service Tax liability paid by the assessee had to be considered as “duty” and not as adeposit, and consequently, the time bar as per Section 11B of the CEA was applicable. The assessee argued that as no service was provided, no tax was liable, and hence, the amount paid had to be considered as a “deposit” to which the time-bar of Section 11B would not be applicable. In this regard, it placed reliance on the case laws [KVR Constructions – [2010-TIOL-68-HC-KAR-ST]; Natraj and Venkat Associates – [2010-TIOL-67-HC-MAD-ST]; Addition Advertising – [2003-TIOL-124-HC-AHM-ST]; Jyotsana D. Patel – [2014-TIOL-2048-CESTAT-MUM]. The Tribunal observed that Service Tax was paid on the amount of advance received by the assessee, but ultimately no service could be provided as the said works contract was terminated. It placed reliance on the ruling in Addition Advertising v. UOI (supra), wherein the jurisdictional Gujarat High Court had held that if no service was provided then no Service Tax was payable. Thus, it was held that the amount paid by the assessee could not be termed as payment of “duty,” but had to be considered as a “deposit”

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for which the provisions of Section 11B of the CEA, 1944, with respect to refund and limitation, were held to be not applicable. Accordingly, the Revenue’s appeal was rejected.

CCE v. Madhvi Procon Pvt. Ltd.; [2015-TIOL-87-CESTAT-AHM]

Tribunal, Mumbai

Works contract service portion liable to Service Tax even prior to 1 June 2007

Finance Act, 1994; partly in favor of assessee – matter remanded

The assessee was engaged in work of “Engineering Procurement & Civil Construction of Main Power Plant” for BHEL during the period December 2004 to March 2007. The steel required for construction had been supplied by BHEL to the assessee, free of cost, and the remaining materials had been procured/purchased by the assessee. The Revenue demanded Service Tax in terms of Section 65(25b), read with section 65(30a) of the Finance Act, 1994 (i.e., Commercial or Industrial Construction Services). The Tribunal observed that as classification of service was to be determined as per the definitions of various taxable services prevalent during the relevant period, merely because classification would change the basis of the introduction of a taxable service under which an existing service gets more specifically covered, in no way would this mean that the said service was not necessarily taxable during the prior period. The Tribunal placed reliance on the Delhi HC’s judgment in the case of G.D. Builders v. Union of India; [[2013] 40 taxmann.com 415], wherein it was categorically held that as per the provisions of Section 65(105)(zzq) and (zzzh), Service Tax was payable and chargeable on the service element of the contract for construction of industrial and commercial complexes and contract for construction of residential complexes, and in case of a composite contract, the service element should be bifurcated and ascertained and then taxed. Placing reliance on the aforesaid HC ruling, the Tribunal held that the Service portion in the works contract was liable to Service Tax even prior to 1 June 2007 under the categories of commercial or industrial construction/construction of the complex. It further observed that

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Service Tax was held to be payable and chargeable on the service element of the contract for construction of industrial and commercial complexes and the contract for construction of residential complexes, and in the case of a composite contract, such that the service element would be bifurcated and ascertained and then taxed, even prior to 1 June 2007.

National Building Construction Corporation Ltd. v. Commissioner of Central Excise and Service Tax; [(2015) 54 taxmann.com 244 (New Delhi - CESTAT)]

Tribunal, New Delhi

Only the rate of tax prevailing at the time of rendition of taxable service would be levied and collected; rate in force on date when payment was made or received would not be made applicable.

Finance Act, 1994; in favor of assessee

The assessee had raised bills on the recipient of consulting engineer’s services, which were provided by it prior to 13 May 2003. Payment of the said bills was however received subsequent to 13 May 2003. With effect from 13 May 2003, the rate of Service Tax had been raised from 5% to 8%. However, payment for the services was received on or after 13 May 2003 when the rate of Service Tax had increased to 8%.The Revenue demanded Service Tax at 8% on the ground that the rate in force on the date when the taxable event took place was applicable, and since Service Tax was payable on a receipt basis, rate in force on that date (8%) was applicable. It placed reliance on CBEC’s letter dated 28 April 2008 (CBEC letter), stating that the rate applicable to a taxable transaction would be the rate in force at the time the Service Tax became chargeable, meaning the date on which the taxable payment was received. The relevant portion of the CBEC letter read as under:

“The rates applicable to a taxable transaction shall be the rate in force at the time the Service Tax became chargeable.”

The Revenue also referred to Rule 5B of Service Tax Rules, 1994, which enjoins that the rate of tax in case of services provided or to be provided shall be the rate prevailing

at the time when the service was deemed to have been provided under rules made in this regard. The Tribunal held that only the rate of tax prevailing at the time of rendition of taxable service could be levied and collected and that the rate in force on the date when payment was made or received could not be made applicable, and thus, Service Tax was only leviable at 5%. Neither the CBEC’s letter nor Rule 5B of the Service Tax Rules, 1994 authorize levy of Service Tax at a rate not in force on the date of rendition of the taxable service, which is the taxable event. The Tribunal opined that the “Review Commissioners appear to have fundamentally misguided themselves as to what is clearly a basic principle, that only the rate of tax prevailing at the time of rendition of the taxable service could be levied and collected.” It placed reliance on the Delhi HC’s ruling in the case of Commissioner of Services Tax v. Consulting Engineering Services (I) (P) Ltd; [(2013) 30 taxmann.com 268], wherein this well-established and axiomatic position in law was reiterated.

Commissioner of Service Tax, New Delhi v. Lea Associates South Asia (P) Ltd.;[ (2014) 51 taxmann.com 397 (New Delhi - CESTAT)]

European Union Court (Belgium)

Bundling issue examined by Belgian Courts regarding VAT issue of grant of right to use a football stadium

European Union Value Added Tax laws; in favor of revenue

The assessee purchased (incurring VAT thereon) and operated a football stadium. It built the stadium, including the pitch and related facilities (changing rooms, bar, etc.), which were available to a football club for a specified number of days per season (i.e., for the club’s home matches) and provided various services connected with supervision, management, cleaning and maintenance (mowing, grass-sowing etc.) of those facilities. The assessee charged the football club a flat-rate fee per day for its use of the stadium, out of which 20% was for its right of access to the football pitch and 80% was for the aforementioned services. Further, it deducted all of the VAT incurred on its purchase of the stadium. The issue discussed was whether the grant of the right to use a football stadium constitutes an exempt letting of

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immovable property for the purpose of EU law. The Belgian tax authorities (the Revenue) took the view that the stadium’s facilities supplied by the assessee to the football club constituted an exempt letting of immovable property. On this reasoning, the Revenue considered that the assessee was not entitled to recover all of the VAT incurred on the stadium’s purchase.

The European Court (Court) discussed whether the assessee’s supply to the football club constituted an exempt letting of immovable property. It observed that services linked to the practice of sport should, so far as is possible, be considered as a whole. The Court did not consider that the use of the pitch constituted the main service supplied in the transaction, so that the transaction could be classified as letting of immovable property within the meaning of EU VAT laws. Rather, the assessee supplied a more complex service consisting of provision of access to sporting facilities, where it took responsibility for supervision, management, maintenance and cleaning of the facilities. The role of the assessee was, therefore, more active than that associated with passive letting of immovable property. The value of the various services supplied (80% of the overall charge) supported the view. Consequently, the Court held that the transaction (considered as a whole) should be classified as supply of services (taxable) rather than letting of immovable property (exempt).

European Court decision dated 22 January 2015 in Case C-55/14 Régie communale autonome du stade Luc Varenne

CENVAT credit/Central Excise

High Court, Bombay

No intention of framers of rules to deny MODVAT credit simply because input was not received after job work within 180 days; period of 180 days cannot be held to be mandatory

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

The Revenue’s appeal before the HC, which was admitted, was on the issue whether Rule 57F (4) of the Central Excise Rules, 1944 is mandatory or directory? [i. e., Said Rule 57F(4) is akin to Rule 4(5)(a) of CENVAT Credit Rules, 2004 (CENVAT Rules), which envisaged that credit could be availed on input when received after job work within 180 days]. As per erstwhile laws, the assessee had sent the input to job workers on payment of 10% of the value of the input, as provided under Rule 57F of the Central Excise Rules. However, from January 2000 onwards, the assessee had not paid Excise duty on these input received after the job work under Rule 57F(4) and such input was received even after the stipulated period of 180 days, in terms of Rule 57F (11). Further, the Revenue alleged that the assessee had not reversed the MODVAT credit in respect of the input received after the stipulated period of 180 days in terms of Rule 57F(11) of the Central Excise Rules. The Revenue, thus alleging irregularity of credit, sought to recover the duty, irregular or inadmissible credit, along with interest and penalty from the assessee. However, such

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a demand was dropped by the Commissioner (Appeals) and the Revenue’s appeal before the Tribunal was dismissed. Thus, being aggrieved, the Revenue approached the HC.

The Revenue contended that the Tribunal completely misread and misinterpreted the Rules and that if the Rules contemplated that the input or capital goods were cleared to a job worker and they must be received back within 180 days, the said period was nothing but mandatory, and thereafter, MODVAT credit should not be admissible.

The HC observed that if all these sub-rules are read together and harmoniously as had been done by the Tribunal, then no other view of the matter was possible. It observed that it was not a mandate flowing from the Rules that if the input or partially processed input was not received within 180 days in the factory of the manufacturer, the manufacturer would be disallowed the CENVAT credit in totality. The Rules provide for situations under which, if the goods are not received back within 180 days, the credit can be adjusted. The proportionate credit can be denied by calling upon the manufacturer to debit the account. Thus, the HC held that the aforesaid would indicate as to how the makers and framers of the Rule did not intend to deny MODVAT credit simply because the input was not received after processing or job work within 180 days. The period of 180 days could not be held to be mandatory. In the given facts and circumstances and going by the language of the Rule, both the Commissioner (Appeals) and the Tribunal were right in concluding that the period was not mandatory.

The HC observed that the Revenue’s counsel could not convince it as to how the Tribunal’s view could be said to be perverse or vitiated by any error of law apparent on the face of the record. If the view that could be taken and in the teeth of the clear language of the Rule and the sub-rules, the substantial question of law, as framed, was thus answered against the Revenue and in favor of the assessee. Accordingly, the Revenue’s appeal was dismissed.

Commissioner of Central Excise v. Godrej and Boyce Mfg Co Ltd; [2015-TIOL-263-HC-MUM-CX]

High Court, Bombay

Credit admissible on inputs used in manufacture of finished goods that were destroyed in a fire — erstwhile Rule 57A did not mandate that credit of duty could be claimed only if there is emergence of a final product or that manufacture of the final product is complete.

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

The issue brought forth by the Revenue before the HC was of admissibility of credit on such duty paid input used for manufacture of finished goods that had not come into existence due to destruction in a fire. The assessee contended before the HC that from a combined reading of Rule 57A and Rule 57F(1) of the erstwhile Central Excise Rules, 1944 (Central Excise Rules), input in respect of which credit had been allowed (under Rule 57A) could be used in or in relation to the manufacture of final products for which such input had been brought into the factory.

The HC, accepting the contention of the assessee, observed that the legislature at that time envisaged that so long as the goods styled as input had been brought in for the purpose of usage in or in relation to manufacture of the said final products, the credit could be claimed in terms of the Central Excise Rules. It observed that there was nothing in the Central Excise Rules that mandated that credit of duty can only be claimed (in relation to such input) if there was emergence of a final product or when manufacture of the final product was complete. It held that had that been the intent of the Legislature, the words “goods used in or in relation of the manufacture of the said final products” would not have appeared in sub-rule (1) of Rule 57A. Accepting the Tribunal’s decision and placing reliance on the plain meaning in the provisions, the HC held that the intent of the rule makers was not to disallow credit, merely because a contingency over which the assessee had no control had taken place. Thus, it held that no one could have predicted a fire occurring in the manufacturing plant of the assessee. That the fire occurred at the relevant time but the goods were already utilized in the process of manufacturing of the final product, the credit paid on such goods would have been admissible. As

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there was no dispute about these facts, including the fire, the Tribunal took the view that the language of the Rule did not permit it to agree with the Revenue and deny the assessee the credit. Further, holding that the Tribunal’s conclusion could not be termed as perverse or vitiated by any error of law apparent on the face of the record, substantial questions of law were answered in favor of the assessee and against the Revenue, and consequently, the Revenue’s appeal was dismissed.

CCE v. Asian Paints India Ltd.; [2015-TIOL-369-HC-MUM-CX]

High Court, Bombay

Storage tanks not “capital goods” under erstwhile Rule 57Q; credit inadmissible pre-2001

Central Excise Tariff Act, 1975 and Central Excise Rules, 1944; in favor of revenue

The assesse, in pursuance of manufacturing, availed MODVAT credit on storage vessels, storage tanks and structures classified under the respective headings of Chapters 73.11, 73.09 and 73.08 of the Central Excise Tariff Act, 1975. The Revenue contested that such credit was wrongly availed, in response to which the assessee submitted that the credit had already been reversed. Subsequently, MODVAT credit on storage vessels and structure was disallowed by the Assistant Commissioner. Aggrieved, the assessee filed an appeal before the Commissioner (Appeals) that allowed this. Thereafter, an appeal was filed by the Revenue before the Tribunal, wherein the Tribunal accepted the Revenue’s argument that in terms of the applicable rules, the storage vessels/storage tanks, which were stated to be an integral part of the plant of the manufacturing unit of the assessee, were not specifically mentioned in the table below the rule with the tariff heading numbers. The Tribunal observed that so long as these items or goods were not part of the scheme under Rule 57Q, the MODVAT credit could not be allowed.

Being aggrieved, the assessee filed an appeal before the HC. The issue before the Hon’ble Bombay HC was whether benefit of MODVAT credit could be extended to storage tanks/vessels, which had not been included under the erstwhile Rule 57Q of Central Excise Rules, 1944.

The Hon’ble HC dismissed the assessee’s appeal, observing that storage tanks/vessels were not “capital goods” falling under Rule 57Q of the erstwhile Central Excise Rules, 1944, and held that credit on the same was inadmissible pre-2001. It concurred with the Hon’ble Tribunal’s view that credit was not extendable as “storage tanks” were not specifically included under Rule 57Q, albeit being used in the factory for manufacture of final products and were forming an integral part of a plot set up for finished goods manufacture. The HC observed that credit would be available only in relation to capital goods of specific heading numbers falling under Schedule to Central Excise Tariff and listed in Rule 57Q, which were used in factory of manufacturer. The HC also observed that even though Rule 57AA of the CENVAT Credit (Second Amendment) Rules, 2000 was amended, no reference to the capital goods falling under the relevant and applicable Chapter was made. Additionally, the HC observed that the Karnataka HC in the case of Commissioner of Central Excise v. Doodhaganga Krishna Sahakari Sakkare Karkhane Niyamit; [2013 (297) ELT 361] had applied and followed the ruling in the case of ICL Sugars cited by the assessee. The HC observed that the rejection of the CENVAT credit was on a factual basis, and it was on the distinct ground that because the final molasses storage tank, if erected on the earth became non-excisable. The Bombay HC held that the Karnataka HC did not mean to make the findings a rule for all storage tanks. Accordingly, the appeal was dismissed by the Bombay HC against the assessee and in favor of the Revenue.

Uttam Galva Steels Ltd. v. CCE; [TS-40-HC-2015(Bom)-EXC]

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Customs

High Court, Bombay

The assessee cannot have any apprehension that they will not be dealt in accordance with law.

Customs Act, 1962; partly in favor of assessee

The assessee has claimed that the Deputy Director, Directorate of Revenue Intelligence (DRI), orally instructed it to deposit alleged differential duty on imported goods. The DRI contended that the assessee’s affidavit before the Bombay HC was nothing but an attempt to avoid investigation, scrutiny and even re-assessment permissible under law. Vide an additional affidavit before the HC, the assessee submitted that the DRI has demanded an amount upfront toward differential duty and also threatened seizure of the goods if the assessee failed to abide by its oral directions.

The Hon’ble HC held that the assessee should not have any apprehension that it would not be dealt with in accordance with the law and that an opportunity would be given to the assessee in accordance with law in the event it was desirous of reopening any assessment, as had been stated in its affidavit. The Hon’ble HC also held the enough powers were available with several authorities under the Customs Act, 1962 by which if the assessee was visited with adverse adjudication orders, these could be challenged on the point of jurisdiction as well as on merits.

The HC further held that any consignments imported by the assessee thereafter, when being subjected to scrutiny or verification (even any liability toward duty) would have to be determined and adjudicated only in accordance with the law. The HC also held that the provisions enabling ad hoc or provisional assessment would be within four corners of the law and would be resorted to. The HC did not pass any preventive or prohibitory orders favoring the assessee. There appeared to be no basis for halting of the investigations, if already initiated, on account of the pending litigation. However, the HC did direct the DRI to conclude the investigations in order to avoid uncertainty, confusion and chaos.

Carestream Health India Pvt. Ltd. v. Union of India; [2015-TIOL-323-HC-MUM-CUS]

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39 Tax Digest

High Court, Bombay

Redemption fine not imposable when export goods are not available for confiscation

Customs Act, 1962; in favor of assessee

The assessee imported various consignments/goods under the advance licence scheme. It availed duty-free clearances under Notification No. 203/92- Cus dated 19 May 1992 (Notification) against such licenses. The notification allowed that exemption inter alia if export obligation was discharged within the period specified in the Export Obligation Discharge Certificate or within such extended period, as was granted by the Licensing Authority, by exporting the manufactured goods in respect of which no input credit had been obtained under Rules 56A or 57A of the Central Excise Rules, 1944.

The Revenue disputed that the assessee had wrongly declared on the export documents to the effect that no input credit (MODVAT) had been availed on the input used in manufacture of export goods, while in fact, such benefit was availed for the export of goods. Upon adjudication, confiscation was confirmed and redemption fine was imposed. On appeal, however, the Tribunal dropped the redemption fine since the goods had not been seized and were not available to be confiscated. Being aggrieved, the Revenue filed an appeal before the HC.

The issue before the Hon’ble Bombay HC was whether or not the Tribunal was correct in dropping redemption fine where the goods were not available for confiscation/seizure. The HC was of the view that the Tribunal’s order had been rendered in the backdrop of peculiar facts and circumstances and found that the Tribunal’s view in the backdrop of factual position would be possible. Reliance was placed on the Division Bench’s ruling in the case of Finesse Creation [2009 (248) ELT 122] to hold that availability of goods was one of the criteria for confiscation. The Division Bench had a distinguished SC ruling in the case of Weston Components v. Commissioner [2000 (115) ELT 278] and concluded that redemption fine is a concept that arises in the event where goods are available and are to be redeemed. If the goods were not available, there was no question of such redemption of the goods. Considering the language of Sec 125(1), the Tribunal’s order did not suffer from any serious legal infirmity or perversity, which would warrant its interference. The HC observed that once the export

obligation was discharged, it is the latter part of Section 125(1) that would be applicable.. The goods were of the latter category but were not available due to discharge of export obligation by the assessee. Therefore, it was held by the HC that where seizure of goods was not possible, the question of redemption fine would not arise. The HC thus found no substantial question of law arising in the appeal, and accordingly dismissed the Revenue’s appeal.

Commissioner of Customs v. National Leather Cloth Manufacturing Company; [TS-34-HC-2015(BOM)-CUST]

Tribunal, Ahmedabad

No bar against pleading a law point at any stage

Customs Act, 1962; in favor of assessee

The assessee contended that the Additional Commissioner (AC) had earlier passed an order allowing clearance of imported goods, only after (i) enhancement of value on imported goods, (ii) confiscation of the said goods and (iii) imposition of a redemption fine. However, the said AC was transferred before issuing a formal speaking order. Subsequently, another AC issued an order-in-original (OIO), which in addition to the aforesaid conditions, imposed more conditionalities on the assessee for permitting release of goods, viz., that (a) goods would be redeemed only on an import license being issued by the Director General of Foreign Trade (DGFT) and (b) permission from the Minister of Environment and Forest was to be obtained (additional conditionalities). Being aggrieved, the assessee approached the Tribunal.

The assessee contended that the second AC could not have modified the order of the earlier AC as the former was not an appellate or revisionary authority vis-a-vis the latter. Supporting the impugned OIO, the Revenue contended that it was issued only after providing a hearing to the assessees and the said plea was not contended by it earlier. The Tribunal stated that at the very outset, there is no bar against pleading a law point at any stageand observed that the assessee was not agitating against the OIO, but only the additional conditionalities. The Tribunal held that the subsequent AC had no authority to sit in judgement over the decision of the earlier AC, being neither a revisionary authority nor an appellate authority with respect to the latter. Further, without expressing an opinion on the legality of the additional conditionalities, it

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40 Tax Digest

held that it had no force in law as the AC lacked authority to modify the OIO. The Tribunal thus allowed the assessee’s appeal only to the limited extent of setting aside the additional conditionalities.

Saji International v. Commissioner of Customs; [2015 (316) ELT 497]

Tribunal, Mumbai

Royalty or license fee held not includible when paid by the assessee for the technical know-how received and had nothing to do with import of raw materials

Customs Valuation Rules, 1988; in favor of assessee

The Commissioner’s (Appeals) order had held that royalty or licence fees paid by the assessee to its related foreign collaborator was includible in the assessable value of the goods imported by the assessee in terms of Rule 9(1)(c) of the Customs Valuation Rules, 1988. Being aggrieved, the assessee approached the Tribunal to appeal against the Commissioner’s (Appeals) order. The Tribunal in this regard inter alia placing reliance on Foesco India Ltd. [2014-TIOL-552-CESTAT-Mum] and held that the royalty paid by the assessee for the technical know-how received had nothing to do with import of raw materials. Consequently, the same was held to be not includable in the assessable value of the goods imported. Thus, the assessee’s appeal was allowed.

Lord India Chemical Products Pvt. Ltd. v. Commissioner of Customs; [2014-TIOL-2517-CESTAT]

Tribunal, Mumbai

Lumpsum amount paid to related parties towards trademark fees and royalty for technical know-how shall not be added to import value of material and parts imported from the same related party

Customs Valuation Rules, 1988; in favor of assessee

The assessee imported certain raw material and parts from overseas related parties. It entered separate agreements to receive technical know-how and use the trademark of such related parties on semi-finished/finished goods produced by it. The agreement for purchase of raw material and parts also allowed the assessee to purchase

material and parts from a third party, subject to quality standards. For using the trademark of a related party, the assessee paid a lumpsum amount of fees and also fees on a periodic basis, which was calculated as a specified percentage of the total sale value of the final product. The same arrangement was followed for arrangement under agreement for technical know-how. As the lumpsum payments were to be in relation to import of raw material from related parties, the Revenue proportionately added such lumpsum payment toward trademark and technical know-how to the value of the imports, alleging that the import value of the goods had been influenced due to the relation between the parties. However, recurring payments of trademark fees and royalty were not added by the Revenue. Thus, the Revenue argued that the observation of quality standards on purchase from a third party would be construed as indirect control over the assessee by the related party, which influenced the price of the raw material and parts.

The Tribunal placed reliance on the decision of the SC in the case of UOI v. Mahindra & Mahindra Ltd [1995 (76) ELT 481 (SC)]. In the said case, transactions to purchase material and royalty for technical know-how were considered separate transactions, and thus, lumpsum payment of royalty for technical know-how could not be added to the value of imported materials. The said principle was held by the SC even though provisions relating to supply of material and provision of technical know-how were contained in the same agreement. It held that on perusal of agreements for usage of trademark and provision of technical know-how, there was no provision in the agreements that obliged the assessee to purchase materials and parts from related parties. Further, the agreement to supply materials and parts allowed the assessee to purchase materials and parts from a third party. Hence, it was held that the lumpsum payment made could not be added to the value of the imported material. Additionally, the Tribunal stated that the Revenue’s stand to add lumpsum payment and not to add regular/running payment of royalty and trademark fees was contradictory, and thus, was not accepted.

Can-Pack (India) Pvt Ltd v. Commissioner of Customs, Mumbai; TS-579-Tribunal-2014-(Mum)

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41 Tax Digest

Tribunal, Mumbai

Royalty payments made in respect of technical know-how and fees paid for basic engineering and supervisory services found to be includible

Customs Act, 1962; Customs Valuation Rules, 1988; in favor of revenue

The assessee imported capital goods, equipment, components, etc., for initial setting up of a plant to manufacture “hot briquette sponge iron” under Project Import Regulations, 1986. The assessee entered four agreements with foreign suppliers/collaborators for supply of equipment, basic engineering, process licensing and supervisory services. The Revenue raised an objection that the considerations paid for basic engineering, supervisory services and supply of technical know-how under the Process License Agreement were includible in the assessable value of goods supplied in terms of Rule 9(1)(c) and 9(1)(e) of Customs Valuation Rules,1988, read with Section 14 of the Customs Act, 1962. Accordingly, the Revenue sought to demand differential duty with interest. The lower authorities confirmed these demands, which led the assessee to file an appeal before the Tribunal. The issue before the Tribunal pertained to inclusion of the amount paid toward basic engineering, supply of technical know-how and supervisory services in the assessable value of capital goods imported by the assessee.

The Tribunal observed that the agreements were all inter-linked and inter-dependent having a direct nexus with each other. It was only after the agreements were made that supply of equipment was possible and subsequent installation, operation, maintenance and use of equipment were carried out by the assessee. Thus, the Tribunal held that these agreements constituted a package and could not be separated from each other, and the consideration paid thereunder would form an integral part of supply of equipment agreement. The Tribunal observed that the royalty payment was for the process know-how that was incorporated in the plant and equipment supplied. Further, the Tribunal observed that the supervisory services comprised assignment of the agreed number of technical personnel providing specialized advice to the assessee for detailed engineering, erection, start-up, etc., and to train the personnel of the assessee. The Tribunal referred to SC ratio in CCE v. Al Noori Tobacco

Products [2004 (170) ELT 135 (SC)] in which it was held that Courts shall not place reliance on decisions without discussing the factual relevance to the case in hand, and thus it quashed the precedents relied by the assessee. However, the Tribunal considered the precedents relied upon by the Revenue to be more apposite for the present case. In the case of Essar Gujarat Ltd. [1996 (88) ELT 609 (SC)], the assessee had entered separate agreements for process license and technical services for technology transfer, and the SC had held that as they were essential for making the plant operational, payments made to third parties in this respect were includible in the assessable value of the goods/plant imported from the supplier. The SC had observed that it was only after the agreement was entered that the purchase of plant took place, and it was essential to obtain the license to operate such a plant with the help of technology know-how from a provider of technical services. Thus, the SC had concluded that the amount payable as part of process license fees would be included in the value of the plant. Additionally, in the case of Otto India Pvt. Ltd. [2002 (149) ELT 477], the Tribunal had considered the question of whether the price paid for technical know-how for import of equipment from collaborator of importer was to be included in the assessable value of the goods imported. It had held in that case that as the import of goods was directly connected with supply of technical know-how, the price actually paid (including value for engineering, development, design work, etc.) would be included in the transaction value. Further, reliance was placed upon the SC’s ruling in the case of Andhra Petrochemicals Ltd [1997 (90) ELT 275 (SC)] and Mukund Ltd [1999 (112) ELT 479 (SC)]. Thus, applying the aforesaid ratio of these precedents collectively, the Tribunal concluded that the royalty paid on process know-how and the various fees paid for basic engineering services and supervisory services would be includible in the assessable value of the equipment imported under Rule 9(1)(c) and 9(1)(e) as these payments were integrally connected with the supply of equipment, and formed part of the package deal. Therefore, the impugned order had no infirmity. Further, from a reading of the settlement agreement, the Tribunal noted that it did not affect the payment required to be made for supply of equipment and the royalty under the Process License Agreement, and the obligation under these agreements remained intact, and in the absence of conclusive evidence

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42 Tax Digest

to show that the payments made so far were toward the final settlement of all obligations, the assessee’s plea was not sustainable. Accordingly, the Tribunal dismissed the assessee’s appeal and upheld the orders of the lower authorities.

Welspun Maxsteel Ltd v. Commissioner of Customs [TS-628-Tribunal-2014-CUST]

Tribunal, Mumbai

Exemption unavailable where imported road construction equipment was diverted, violating actual user condition.

Customs Act, 1962; in favor of revenue

The issue before the Tribunal was whether the assessee (i.e., the importer) could avail exemption of the benefit in terms of General Exemption Notification No. 21/2002 (Notification) when machinery imported was not used exclusively by the assessee. The Revenue, basis intelligence gathered, contended that the assessee had wrongly availed duty exemption on contract given by an agency not specified in the notification by diverting the machines imported to different sites, which was clearly a violation of the conditions mentioned in Notification. Being aggrieved, the assessee appealed before the Tribunal. The Tribunal observed in the case of Shreeji Constructions v. CC, Mumbai [2013-TIOL-441-Tribunal-MUM], wherein it was held that MMRDA is not a road construction corporation as specified in the notification, and therefore, the benefit of the said notification could not be extended to projects awarded by the MMRDA prior to Budget 2012, when the MMRDA was specifically included as one of the organizations that could award contracts. The Tribunal further observed that this conclusion was arrived at after careful analysis of the constitutional and organizational architecture of the MMRDA and on a critical analysis of the constitutional and generic statutory functions entrusted to it. Thus, it concluded that the assessee was not entitled ab initio for the benefit under the said notification. Also, both the machines, after being used for one and half years, were diverted. The said notification envisaged that the importer would use the imported goods exclusively for the construction of roads by it and not sell or dispose them in any manner for a period of five years from the date of import. However, after using the equipment for a period of 1 to 1.5 years only, the machines were diverted for use by

others, which meant that the assessee did not utilize the goods for the entire period of 5 years for himself. Thus, the Tribunal recorded a clear violation of the post importation condition. Further, it was a settled position in law that an exemption notification has to be construed strictly, being in the nature of an exception. Thus, since the assessee had violated the conditions, the Tribunal held that it was not eligible for benefit of exemption, and consequently, was held to be liable to pay the differential duty at the rate prevailing at the time of import of the goods. Moreover, it was found that since the assessee had suppressed the fact of diversion, the Tribunal held that the extended period of time was rightly invocable and an interest under Section 28AB of Customs Act, 1962 was levied. As the assessee had diverted the goods before completion of five years, the Tribunal found that even confiscation of the goods was justified. However, the Tribunal felt that as the redemption fine in relation to the confiscated goods was on the higher side, it reduced it marginally in terms of the two machineries.

Atlanta Infrastructure Ltd. & another v. Commissioner of Customs (Import), Mumbai; [TS-35-Tribunal-2015-CUST]

VAT/Central Sales Tax (CST)

High Court, Bombay

Sales tax levy upheld; HC distinguishes the landmark ruling of the Hon’ble SC in the case of BSNL relating to the right to use goods

Bombay Sales Tax Act, 1959; in favor of revenue

With a view to systematically develop, promote and enhance its brand equity in the “brand name” of its company, as well as to legally protect the same, the assessee entered an agreement with some of its group/subscribing companies. During the assessment years, 1998–99 to 2001–02, sales tax authorities examined the transaction between the group companies and held that the terms of the agreements would fall within the definitions of the terms “sale,” “goods” and “turnover of sale” and attract the law in question styled as the erstwhile Maharashtra Sales Tax on the Transfer of Right to use any Goods for any Purpose Act, 1985 (Act of 1985). Accordingly, the assessee was issued notices demanding Sales Tax on the turnover of sales in respect of transfer

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43 Tax Digest

of the right to use any goods. The assessee filed a writ petition before the Bombay HC. It was observed by the HC that perusal of sections of the Act of 1985 indicates that tax is leviable on turnover of sales for transfer of the right to use any goods, and in terms of Entry No. 7 of the Schedule, transfer of the right to use goods of incorporeal or intangible character such as trademarks and patents was held as exigible to tax. The Hon’ble HC, concurred with the Revenue’s view that there could be transfer of the right to use these goods and it need not be exclusive and unconditional, and tax would be levied even if there were multiple transferees and the transferor continued to use the goods along with these. It was thus observed:

“…The Act does not give any indication as is rightly urged before us that the right to use the incorporeal/intangible goods should be exclusively transferred in favour of the transferee. The nature of the transfer or the nomenclature assigned to the act will therefore not necessarily be decisive….”

In this regard, the Hon’ble HC refused to apply the “dominant nature test” evolved by Hon’ble SC in the BSNL ruling [reported at (2006) STC 195 (91)]. The HC observed that the SC had dealt with an altogether a different controversy (i.e., whether services rendered by BSNL could be brought within the purview of tax envisaged by Entry No. 54, List II of Seventh Schedule to the Constitution). In addition, the HC observed that it was incorrect to hold the Division Bench ruling in Duke & Sons Pvt. Ltd. [reported at 1999 (1) MHLJ 26] was no longer good in law, since the judgment had been consistently referred to and quoted, approved by the Kerala HC and the Andhra Pradesh HC, which are subsequent to the BSNL’s ruling.

Tata Sons Limited & Another v. State of Maharashtra & Another; [TS-33-HC-2015 (Bom)-VAT]

HC, Punjab and Haryana

Supply of medicine/stents in medical surgeries not “deemed as sale”

Punjab VAT Act, 2005; in favor of assessee

The issue before the HC was whether supply of drugs, medicines, implants, stents, valves and other implants that are integral to medical services/procedures would be termed as “sale,” as defined under the Punjab or Haryana VAT Act, and be exigible to VAT.

The HC observed that a medical procedure that as an integral part requires administration of drugs, etc., could only attract VAT if it fulfilled all the aspects of sale, as defined under the Punjab and Haryana VAT Acts and Article 366 (29A).

Thus, the intention of parties, the nature of goods, delivery, etc., were important determinative factors of whether a medical procedure involved “sale of goods.” The HC further noted that the dominant purpose of medical treatment is medical services and that administration of drugs and medicines were integral to such service. The HC was of the view that supply of medicines, stents, etc. would not enable the state to infer a fictional sale or a severable contract that could be treated as sale and subjected to taxation. The HC observed that a medical procedure was a pure service with no part having the attributes or elements set out in Article 366 (29A) or the definition of sale under the Punjab and Haryana statutes, and therefore, could not be held to involve “sale.” The HC observed that the power to impose VAT flows from Entry 54, List II, Schedule VII and Article 366 (29A), but where the element of sale is altogether missing and the transaction does not fall within these provisions, the state is not empowered to levy VAT on such transactions. The HC observed that too attract VAT, a transaction (or its part) which is essentially a service, would have to qualify as a sale within the meaning of Sales of Goods Act, 1930 or the definition of sale and that the fiction of a deemed sale would only apply in cases falling within the sub-clauses or Article 366 (29A), which permit severance of the service element from the sale element. The HC further observed that Article 366 (29A) did not cover services provided by hospitals and that deeming it fiction must be rational and not farcical. The HC also observed that the dominant purpose of a hospital was to provide medical treatment, and the medicines and stents necessary in a procedure could not be deemed as “sale” and a contract of medical service could not be said to be a contract for sale of stent, valve, etc. It noted that the fact that a hospital charges money could not raise an inference of intent to sell goods in the form of medicines, etc. Thus, the HC completely concurred with the opinion recorded by the Jharkhand HC in Tata Main Hospital vs State of Jharkand [2008 (2) JCR 174 (Jhr)] case and Allahabad HC in International Hospital Pvt. Ltd (Civil Writ Petition No.17117 of 2014). The HC also rejected the argument

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44 Tax Digest

that definition of “sale” under the Bihar and UP Acts is different. Thus, the HC held that the medical procedure provided by the assessee was aservice and that supply of medicines and drugs integral to these services could not be severed to infer as sale as per the Punjab and Haryana statutes. Accordingly, the HC held against the Revenue and in the assessee’s favor.

Fortis Health Care and another v. State of Punjab and another (other parties include Escorts Hospital and International Hospital); [TS-48-HC-2015(P & H)-VAT]

High Court, Allahabad

Hydraulic excavator held to be a “motor vehicle” and not “machine”

Uttar Pradesh Tax on Entry of Goods into Local Areas Act, 2007; in favor of assessee

The issue that arose before the Allahabad HC was whether a hydraulic excavator is a machine falling under Entry 2 or a motor vehicle falling under Entry 13 of the schedule attached to the Uttar Pradesh Tax on Entry of Goods into Local Areas Act, 2007 (UP Entry Tax Act).

The HC rejected the Revenue’s contention that a hydraulic excavator was classifiable as as a machine under Entry 2, not as a motor vehicle, since it was not used to carry loads on roads. The HC applied the maxim Generalia Specialibus non Derogant to observe that “machinery” is a general term and when some kinds of machineries are separately mentioned, they become a “special entry” prevailing over the general one. It further held that the term “machinery” is a genus and “motor vehicle” a species. Reliance was placed on the interpretation by the Gujarat HC in Rashmi Enterprises v. State of Gujarat,[1993(91) STC 295], which had followed the interpretation of the term “machinery” by te Privy Council in Corporation of Calcutta v. Chairman of the Cossipore and Chitpore Municipality [AIR 1922 PC 27], wherein the HC agreed that “machinery must be something more than a solid structure built upon the ground whose parts either do not move at all or, if they do move, do not move the one with or upon the other in interdependent action with the object of producing a specific and definite result.” The HC thus held that the general consensus in the context of “machinery” was

that it is a device used for a particular purpose or result, which takes energy in any form but results in combined functioning to achieve the work which otherwise may not be possible by human physical efforts or power. The HC, upholding the Tribunal’s order, held that the hydraulic excavator, used for digging earth and carrying stone boulders, would be covered by the specific entry of “motor vehicle” under Entry 13 of the Schedule to the UP Entry Tax Act, despite being a ‘machine” in a wider sense.

Commissioner of Commercial Taxes v. Anand Tyres; [TS-39-HC-2015(ALL)-VAT]

Karnataka HC

Work stations not “furniture” but accessory to computer, allows input tax credit

Karnataka VAT Act, 2003; in favor of assessee

The issue before the Karnataka HC was whether Input Tax Credit (ITC) would be available on work stations purchased by the assesse, engaged in the business of development and sale of computer software.

The HC upheld the Tribunal’s finding of “work stations” not being “furniture” falling under the list of restricted items for the ITC that was availed under the Vth Schedule of the Karnataka VAT Act, 2003 (KVAT Act). Section 11 of the KVAT Act disallowed the ITC on goods specified in the Vth Schedule, used for purposes other than re-sale or manufacture or any other process of other goods for sale. It rejected the Revenue’s contention that “a cubicle or a work station would fall within the meaning of the word “furniture” and that the assessee was not entitled to benefit from input tax paid for acquiring such work stations.” The HC observed that work stations or cubicles are used to sit on and operate computers, and thus were an accessory of computers and computer peripherals, which in common parlance is not understood as “furniture” as convenience or decoration.

State of Karnataka v. Infosys Technologies Limited; [TS-672-HC-2014(KAR)-VAT]

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45 Tax Digest

Key statutory updates

Service tax

• Central Board of Customs and Excise (CBEC) issues notification (amending Service Tax Rules, 1994) and circular to provide for powers to scrutinize accounts by designated officer/nominated Cost Accountant/Chartered Accountant during Service Tax audits —Rule 5A of Service Tax Rules, 1994 (STR) read with Sections 72A and 94(2)(k) of the Finance Act, 1994

The CBEC, vide a notification, while amending Rule 5A(2) of STR, has given powers to an empowered officer or audit party deputed by the Commissioner or Comptroller and Auditor General of India or a nominated Cost Accountant or Chartered Accountant to scrutinize records such as records maintained under Rule 5(2) of STR, cost audit reports maintained under the Companies Act, 2013 and Income Tax audit reports.

The circular issued in this regard by the CBEC provides that statutory powers are now available in Section 94(2)(k) [amended w. e. f. 06 August 2014] of the Finance Act, 1994, which inter alia includes audit/verification of Service Tax assessees by departmental officers. The circular also states that the Delhi HC’s decision in the case of Travelite (India) [2014-TIOL-1304-HC-DEL-ST], quashing Rule 5A (2) of the Service Tax Rules, stands distinguished pursuant to amendment in its powers. Nevertheless, the Hon’ble larger bench of the SC has stayed the operation of the HC order [2014-TIOL-101-SC-ST-LB].

Notification No. 23/2014-ST dated 5 December 2014 and Circular No. 181/7/2014-ST dated 10 December 2014

• Notification issued on amendment in territorial jurisdiction of Commissioners

The CBEC issued a notification amending the earlier Notification No. 20/2014-ST dated 16 September 2014 to amend the territorial jurisdiction of various offices of the Principal Commissioner of Service Tax, Commissioner of Service Tax, Principal Commissioner of Central Excise and Commissioner of Central Excise in Bangalore, Delhi, Mumbai and Noida.

Notification No. 1/2015-Service Tax dated 20 January 2015

• Notification on adjudication of DGCEI cases

The CBEC, vide a notification, has specified that the Principal Director General of Central Excise Intelligence will have jurisdiction over the Principal Commissioner/Commissioner of Service Tax/Central Excise to assign show cause notices issued by the Directorate General of Central Excise Intelligence (DGCE) to such Commissioners and adjudication of such notices by them.

Notification No. 02/2015-ST dated 10 February 2015

Central Excise duty/CENVAT credit

• ►The CBEC has amended Notification No. 12/2012-CE dated 17 March 2012 in a series of notifications to increase the Basic Excise Duty on petrol (both branded as well as unbranded) and on diesel (both branded as well as unbranded) following the decline in global crude prices.

Notification No. 24/2014-CE dated 2 December 2014

Notification No. 01/2015-CE dated 1 January 2015

Notification No. 03/2015-CE dated 16 January 2015

Notification No. 04/2015-CE dated 30 January 2015

• ►The CBEC has exempted Basic Excise Duty on goods donated or purchased out of cash donations for the relief and rehabilitation of people affected by the floods in the State of Jammu and Kashmir; conditions/requisites to be fulfilled specified in the notification for exemption.

Notification No. 25/2014-CE dated 11 December 2014

• Circular for amendment in CESTAT appeal forms

The CBEC has issued revised/amended “pre-figured alpha numeric numbers” to be filled in along with the revised Customs, Central Excise and Service Tax appeal forms, pursuant to restructuring of cadres and formation of new Commissionerates.

Circular No. 991/15/2014-CX dated 17 December 2014

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46 Tax Digest

• Instruction issued for monetary limit on filing appeals in Tribunals/courts

The CBEC had issued an instruction dated 20 October 2010, fixing monetary limits below which a department should not file an appeal before the courts/Tribunals. In reference to this instruction, the CBEC has clarified in its present instruction that such monetary limits also apply to cases of arecurring nature involving the same assessee or different assessee and even to subsequent cases where an appeal is already pending in a higher appellate forum.

Further, it also clarified that the monetary limit should apply to each “case” (each appeal to be filed), e.g., if a composite order is passed disposing more than one appeal/SCN and if a department wants to file more than one appeal against this. Then the monetary limit will apply to each such appeal.

File No. 390/Misc/163/2010-JC dated 26 December 2014

• Circular on issues related to mandatory pre-deposit of duty or penalty for filing appeals

The circular specifies the details to be maintained in respect of each appeal memo filed and pre-deposit paid in a separate register in each Commissionerate. Further, it also directs the Tribunal registry and offices of the Commissioner (Appeals) to send appeal memos filed after 6 August 2014 to the Commissionerates.

The circular also clarifies that amended provisions in respect of mandatory pre-deposit will be applicable to appeals filed on or after 6 August 2014, i.e., the date on which the Finance Bill received the President’s assent. Further, the circular clarifies that amended provisions in respect of pre-deposit will also be applicable in cases of duty drawback, i.e., refund of duty paid on export of goods.

Circular No. 993/17/2014-CX dated 5 January 2015

• Instruction regarding issue of summons in Central Excise and Service Tax matters

The CBEC instructed all its field formations that they should issue summons only as a “last resort.” Further,

it instructed that summons should not be issued to senior officials of large companies/PSUs at the first instance. It is also instructed that summons should not be issued without prior permission of officers not below the rank of Assistant Commissioner.

The CBEC’s instructions try to control abuse of powers by lower lever departmental officers issuing summons.

File No. 207/07/2014-CX-6 dated 20 January 2015

• Circular issued for instruction regarding adjudication of Central Excise and Service Tax cases booked by the DGCEI

The circular instructs that pursuant to restructuring of cadres, new posts had been created in the DGCEI, equivalent to that of Principal Commissioner/Commissioner of Central Excise/Service Tax. Additional Director General (Adjudication) in DGCEI will now adjudicate show cause notices issued by DGCEI offices along with field Commissionerates.

The circular also specified general guidelines to be followed to assign and adjudicate DGCEI cases.

Circular No.994/01/2015-CX dated 10 February 2015

• Circular issued for Central Excise and Service Tax Audit norms to be followed by Audit Commissionerates

Circular No.995/02/2015-CX dated 27 February 2015

Customs

• The Central Government has granted exemption from Customs Tax to goods imported as donations for the relief and rehabilitation of people affected by the floods in the State of Jammu and Kashmir.

Notification No. 33/2014-Cus dated 11 December 2014

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• The CBEC clarified that DRI and DGCEI officers can adjudicate cases where show cause notices of short levy/non levy of Customs duty have been issued under Section 28 of the Customs Act, 1962; amends Circular No. 44/2011-Cus to the extent that it restricts the powers of such officers under Section 28(8), even if they are assigned as “proper officers” for the purpose of Sections 17 and 28 of the Customs Act, 1962.

Circular No. 14/2014-Cus dated 11 December 2014

• The CBEC clarified exemption of Bank Guarantee (BG) under Advance License/Export Promotion Capital Goods Schemes and 100% BG in the event of the license holder being penalized in the last three financial years will not apply where the Jurisdictional Commissioner is satisfied about the absence of risk to revenue.

Circular No. 15/2014-Cus dated 18 December 2014

• The CBEC clarified that the Superintendent (in-charge of unit applying for deemed exports) was to make two legible photocopies of original copy of ARE-3 (that bears his counter signature) and attest true copies with his dated signature. Ths has been done to avoid the difficulty faced by units in obtaining deemed export benefits where ARE-3 is not certified by Central Excise authorities.

Circular No. 16/2014-Cus dated 18 December 2014

• CBEC reviews Accredited Clients Programme (ACP)

Provisions for restoration of ACP status, have been withdrawn or not extended on account of ACP clients having been served with show cause notice in terms of amended para 7(iii) of Circular No. 42/2005-Cus. Accordingly, the ACP status can be restored after 3 months if an entity pays the duty demanded with interest and 25% penalty within 30 days of the show cause notice, and after 6 months, on payment of duty with interes The ACP also specifies the threshold limit of INR0.5 million (Customs/Excise) and INR0.25 million (Service Tax) for non-denial of ACP status.

Circular No. 18/2014-Cus dated 22 December 2014

• The Central Government has extended the 24x7 customs clearance facility to 14 new seaports w.r.t. import/export, and 13 new airports w.r.t. to exports. The objective of this facility is to ensure the participation of all agencies to resolve outstanding issues. Chief Commissioners of Customs are to deploy sufficient staff on a 24x7 basis at specified locations and give wide publicity to this trade-facilitation measure.

Circular No. 19/2014-Cus dated 31 December 2014

• Basic Customs duty has been reduced on various specified goods imported from Korea, Japan, Malaysia, ASEAN countries and Singapore under Comprehensive Economic Partnership/Co-operation agreements and Preferential Trade agreements.

Notification No. 35-38/2014-Cus dated 29 December 2014 and Notification No. 1/2015-Cus dated 5 January 2015

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• The CBEC has come up with simplified customs procedures for shipping. It restricts the number of copies of Import General Manifest to be submitted at Cthe ustoms House to two. It gives the option to steamers to submit a continuity bond and merge the guarantee with the continuity bond. Only one copy of the Sub Manifest Transhipment Permit (SMTP) is now sufficient in the case of transhipped cargo, etc.

Circular No. 02/2015-Cus dated 15 January 2015

• The CBEC has come up with a circular in pursuance of the RBI’s guidelines regarding enhancing the limit of export and import of currency notes of the Government of India and the RBI from INR10,000 to INR25,000. It has instructed Commissionerates/officers to follow the guidelines scrupulously.

Circular No. 03/2015-Cus dated 16 January 2015

• The CBEC has clarified that permission for re-export of imported goods under a bona fide mistake will be granted on merit by officer concerned as per the adjudication powers. Requests for re-export of imported goods will be received when goods destined for elsewhere are imported inadvertently at a particular customs station. It has amended Circular No. 100/2003-Cus dated 28 November 2003.

Circular No. 04/2015-Cus dated 20 January 2015

• The CBEC has clarified that no anti-dumping duty can be collected beyond a period of fve years from its imposition date unless the Directorate General of Anti-Dumping and Allied Duties initiates a review before expiry of this period.

Circular No. 05/2015-Cus dated 28 January 2015

• The Kerala Government has issued a detailed procedure for online filing of Works Contract Quarterly Returns in Form 10B. It prescribes separate procedures for declaring turnovers for 2Q 2014 for contracts with receipts up to 2 September 2014 and thereafter.

Circular No. 30/2014 dated 6 December 2014

• The CBEC has clarified that for Customs purposes, a commercial invoice-cum-packing list (with the requisite details) will suffice, but if an importer or exporter desires to submit separate packing list, this will also be accepted.

Circular No. 01/2015-Cus dated 12 January 2015

• The CBEC has notified Panaji Port and Hindaun City, District Karauli, Rajasthan as the Inland Container Depot for loading/unloading of imported/export goods.

Notification No. 14 / 2015-Cus (NT) dated 28 January 2015

Notification No. 19/2015-Cus (NT) dated 09 February 2015

• The Central Government has notified the Customs, Central Excise duties and Service Tax Drawback (Amendment) Rules, 2015 w. e. f. 13 February 2015. It has amended Rule 3, 6 and 7 of the Drawback Rules, 1995, thereby allowing duty drawback on export of “rice” falling under heading 1006 of the First Schedule in the Customs Tariff Act, 1975.

Notification No. 20/2015-Cus (NT) dated 10 February 2015

• The Central Government has revised the duty drawback rates on various products w. e. f. 13 February 2015; inter alia, this includes Protective Industrial Wear (including industrial boiler suits), leather/synthetic gaiters or chaps, and various other items in the Drawback Schedule [Amends notification no. 110/2014-Cus(NT)].

Notification No. 21/2015-Cus (NT) dated 10 February 2015

• The CBEC has clarified the list of documents required in Know Your Customer (KYC) forms. If any document (listed in Board Circular No 9/2010-Cus) has both “proof of identity” and “proof of addresses,” these will suffice for the KYC verification procedure. This also includes the “Aadhar Card” in the documents list required for KYC verification.

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Circular No. 07/2015-Cus dated 12 February 2015

• The Central Government has appointed Bhogat Port as the coastal port to engage in coastal trade in crude petroleum. It has amemended Notification No. 64/94-Cus(NT) dated 21 November 1994.

Notification No. 24/2015-Cus (NT) dated 16 February 2015

• The Central Government has amended various notifications to include Airport Calicut and ICD Arakkonam in its list of ports notified for export and import under EP schemes.

Notification No. 05/2015-Cus dated 20 February 2015

Anti-Dumping Duty (ADD) Notifications

The Central Government has imposed ADD on the following items:

• Import of sodium nitrite originating in or exported from China PR

Notification No. 46/2014-Cus (ADD) dated 08 December 2014

• Definitive ADD on import of cable ties originating in or exported from the People’s Republic of China and Chinese Taipei for a period of five years

Notification No. 47/2014-Cus (ADD) dated 09 December 2014

• Import of clear float glass originating in or exported from Pakistan, Saudi Arabia and the United Arab Emirates (UAE)

Notification No. 48/2014-Cus (ADD) dated 11 December 2014

• Import of Pentaerythritol, originating in or exported from Chinese Taipei for a period of five years

Notification No. 49/2014-Cus (ADD) dated 31 December 2014

• Import of sodium nitrate originating in or exported from the European Union, the People’s Republic of

China, Ukraine and Korea RP for a period of five years

Notification No. 03/2015-Cus (ADD) dated 10 February 2015

• Import of graphite electrodes in all diameters originating in and exported from China PR for a period of five years

Notification No. 04/2015-Cus (ADD) dated 13 February 2015

• Import of acetone, originating in or exported from Korea RP for a period of five years

Notification No. 05/2015-Cus (ADD) dated 18 February 2015

The Central Government has extended ADD on the following items:

• Import of SDH transmission equipment from China PR and Israel

Notification No. 01/2015-Cus (ADD) dated 5 January 2015

• Import of melamine originating in or exported from People’s Republic of China

Notification No. 02/2015-Cus (ADD) dated 7 January 2015

Special Economic Zones (SEZs)

• SEZ rules have been amended to allow dual use of non-processing areas by SEZ entities and DTA entities.

• The Commerce Ministry has amended the SEZ Rules, 2006 by adding a new rule 11A, which provides for bifurcation of non-processing areas.

• The Commerce Ministry has clarified that non-processing areas in SEZs will be divided into two parts wherein the social or commercial infrastructure part can be accessed by entities/persons within and outside the SEZs, while the second part will be marked exclusively for SEZ entities/persons.

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50 Tax Digest

• No exemption/concession will be provided for creation of infrastructure to be used by entities/persons within and outside SEZs.

Notification dated 2 January 2015 issued by the Ministry of Commerce & Industries (Department of Commerce)

Foreign Trade Policy

• The Central Government has authorized the Additional DGFT and ‘Director General of Foreign Trade, aided by one Addl. DGFT, to function as Appellate Authorities against orders passed by Asst. DGFT/Deputy DGFT/Joint DGFT and Additional DGFT/Development Commissioners, SEZs/designated officers of the Departments of Electronics and IT, respectively.

FTP Notification No. 101/(RE-2013)/2009-2014 dated 5 December 2014

• The Central Government has amended its import policy for insecticides under EXIM Code 3808 of Chapter 38 in the ITC (HS) Schedule — I (Import Policy).

This mandates registration for import of all chemicals intended to be used as insecticides, rodenticides, fungicides, etc. For import of insecticides intended for non-insecticidal purposes, import permits must be obtained from the Registration Committee under the Department of Agriculture and Co-operation. No insecticide can be imported from a source other than that specified on the certificate of registration or permit.

FTP Notification No. 106/(RE-2013)/2009-2014 dated 1 January 2015

• The Central Government will allows license-free import of GSM/CDMA-based vehicle- tracking systems with valid International Mobile Station Equipment Identity (IMEI)/Electronic Serial Number (ESN)/Mobile Equipment Identifier (MEID) number. It has amended Chapter 85 of the ITC (HS) 2012 Schedule - I (Import Policy).

FTP Notification No. 105/(RE-2013)/2009-2014 dated 1 January 2015

• The DGFT has reduced the export obligation period to six months from the date of clearance of each consignment by a Customs authority wherever natural rubber is allowed as an input under Advance Authorization/DFIA Schemes. It has amended Appendix 30A of the Handbook of Procedures (Vol. 1), 2009–14.

Public Notice No.81 (RE 2013) / 2009-14 dated 9 January 2015

• The new system of online applications for Importer Exporter Code (IEC), vide Public Notice No. 76 (RE-2013)/2009-2014, was operationalized w.e.f. 1 February 2015; Applicants with access to net banking facilities with 10 notified banks have been allowed to apply online in the prescribed format. However, the facility of manual submissions will remain open for applicants with no access to net banking facilities in notified banks.

Public Notice No.83 (RE 2013) / 2009-14 dated 15 January 2015

• The Commerce Ministry has prohibited import of GSM mobile handsets with duplicate/fake International Mobile Equipment Identity (IMEI) and CDMA mobile handsets with duplicate/fake Electronic Serial Number (ESN)/ Mobile Equipment Identifier (MEID). It has amended the Import Policy Condition under ITC’s (HS) four digit code 8517 of Chapter 85 of the ITC (HS) 2012 Schedule — 1 (Import Policy).

FTP Notification No. 107/(RE-2013)/2009-2014 dated 16 January 2015

• Pursuant to Policy Circular No. 15, the DGFT has issued guidelines for processing of online Importer Exporter Code (IEC) applications and the check list to be followed by regional authorities. The PAN details of applicants are to be verified from the website of the Income Tax Department.

Policy Circular No. 17(RE-2013)/2009-2014 dated 30 January 2015

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51 Tax Digest

• The DGFT has introduced a new format for issuance of Importer Exporter Code numbers in electronic form, i.e., e-IEC, as Appendix 18B-1 in the Handbook of Procedure Vol. 1 (Appendices and Aayat Niryat Forms), 2009-2014. The existing format, Appendix 18B, is to continue for IEC numbers issued in a physical form, based on manual applications. Decisions regarding grant/refusal of IEC are to be conveyed to applicants through SMS and system-generated mails, on their registered email addresses.

Public Notice No.84 (RE 2013) / 2009-14 dated 10 February 2015

• Application fee for online IEC to be INR250 instead of INR500; rectification of Public Notice 79/(RE-2013)/2009-2014

Public Notice No.85 (RE 2013) / 2009-14 dated 13 February 2015

• The DGFT has ordered deactivation of multiple IECs against a single PAN (if not surrendered before 31 March 2015) in view of multiple IECs obtained by some firms/companies from centralized IEC data banks against a single PAN. It has amended Para 2.9 (b) of the Handbook of Procedures Vol. 1 (2009-2014).

Public Notice No.87 (RE 2013) / 2009-14 dated 17 February 2015

VAT/CST Notifications

Gujarat

• Every movement of taxable goods to and through Gujarat is to be accompanied by electronically generated Form 402, Form 403 (before movement of goods commences) or Form 405 (before entering the state), as specified in Rules 51 and 52 of Gujarat VAT Rules, w.e.f. 15 December 2014. Non-compliance with this mandate will be presumed to be non-occurrence of inter-state movement of goods from state.

Guj VAT Order No. GVL/VAT/Sec. 68 and 69(1) dated 3 December 2014

• The Gujarat Government has modified Order No.GVL/VAT/Section 68 and 69(3) under which movement of taxable goods to and through Gujarat is to be accompanied by electronically generated forms. The order is now applicable for the goods of dealers with annual turnovers exceeding INR250 million instead of INR500 million. This includes inter alia other goods, yarn of all types except nylon yarn, polyster viscose yarn and cotton yarn in the said order. The amendment took effect from 15 February 2015.

Order No. GVL/VAT/Sec 68 and 69(4) dated 12 February 2015

• Gujarat VAT department releases FAQ on civil work contractor and Developers Amnesty Scheme

Goa

• The Goa Government has notified Goa VAT (Ninth Amendment) Rules, 2014 w.e.f. date of publication in the state’s Official Gazette. It has inter alia amended Rule 4A for determination of sale price, i.r.o. works contracts, and inserted new Rule 4B for determination of fair market price of goods under Section 18 by appropriate assessing authority or officer authorized by a Commissioner. It has also amended the First, Second and Fourth Schedules of the Act and substituted Tax Return Form VAT-III.

Notification No. 4/5/2005-Fin (R&C) (115) dated 24 December 2014

• The Goa Government has made available the facility for online payment of Commercial Tax from 1 February 2015. All dealers, hoteliers, proprietors or persons required to make online payments through internet banking, debit or credit cards are to generate e-challans before making online payment.

Goa VAT CCT/Trade Circular/2014-15/130 dated 30 January 2015

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Andhra Pradesh

• The Andhra Pradesh Government has exempted farmers/agriculturists from paying tax on local as well as inter-state sale of their produce. Departments are not empowered to detain vehicles transporting paddy purchased from ryots (cultivators). It has instructed Field Officers to advise agents procuring paddy from farmers to obtain registration under the APVAT Act

Notification VAT CCT Ref. No. AI (1)/95/2014 dated 20 December 2014

• The Andhra Pradesh Government has issued directions for finalization of pending assessments under the CST Act f up to 2012–13. Compliance reports were to be submitted by 31 January 2015 where show cause notices have already been issued. Where show cause notices have not been issued, finalization of assessments is to be initiated immediately; Further, it has directed assessing authorities to initiate action in relation to assessment of big cases for 2013–14 to raise demands for locked-up revenue. Deputy Commissioners were to submit compliance reports by 5 February 2015.

Notification CCT Ref. No. Enft.E3/117/2015 dated 21 January 2015

Kerala

• The Kerala Government has issued instructions for hospitals w.r.t the format of invoices to be used for purchase of consumables at MRP u/s 18C(2) of the Kerala VAT Act;. It has clarified that invoices in Form No.8 / 8H, issued by registered VAT dealers under the Act, must carry a declaration certifying that “goods sold are consumables to be used for treatment of patients in hospitals, being sold at MRP and tax thereon collected accordingly.”

Circular No. 32/2014 dated 9 December 2014

• The Kerala Taxation Laws (Amendment) Act, 2014 received the Governor’s assent on 1 January 2015. It has increased Sales Tax rates on foreign liquor under the Kerala General Sales Tax Act and compounded tax rates for works contracts u/s 8 under the Kerala VAT Act.

Notification No. 20478/Leg.A2/2014/Law dated 01 January 2015

• The Kerala Government has clarified that a stay on revenue recovery u/s 72A of the Kerala VAT Rules will only be granted on production of stay orders from the appellate athority. It treats payment of 30% of disputed amount as “stay” and mandated that inspecting Asst. Commissioners stopping recovery is not the correct procedure.

Circular No. 02/2015 dated 9 January 2015

• The Kerala Government has instructed that Form No.16, along with Form No.8F declarations, are to be e-generated by persons bringing goods from outside the state. This facility has been available in “KVATIS” from 15 January 2015. Further, it prescribes a procedure for filing Form No. 16 in “KVATIS” and has mandated that authorities are to accept e-generated Form No. 16 from 1 February 2015 onwards.

Circular No. 03/2015 dated 14 January 2015

• The Kerala Government has rectified the omission of the 4th proviso in Sec 8(a) of the Kerala VAT Act, introduced w.e.f. 1 April 2014 in the e-return filing instructions for “works contracts” under Circular No. 30/2014 dated 6 December 2014. As per the said proviso, a contractor can pay compounded tax up to 31 March 2015 at the existing rate t when he originally opted for compounding for on-going work contracts,.

Circular No. 04/2015 dated 17 January 2015

Maharashtra

• Revised instructions regarding stay in appeals

Due to delayed disposal of appeals on account of late submission of declarations for fixing part payments, the Maharashtra Government has allowed assessees to produce a list of forms received after the assessment order in a prescribed format at the time of filing appeals. Declarations received up to the date of filing appeals only will be considered for the purpose of Sec 26(6) of the MVAT Act. It has also amended the Trade Circular 15T of 2014.

Trade Circular No. 1T of 2015 dated 7 January 2015

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• The Maharashtra Government has issued a trade circular regarding the procedure for submission of returns under the Profession Tax, Luxury Tax and Sugarcane Purchase Tax Act after making payment through the Government Receipt Accounting System.

Trade Circular No. 3T of 2015 dated 20 February 2015

• Extension to Maharashtra Government Information Technology/Information Technology Enabled Services Policy (IT/ITES) Policy 2009

• The Industries, Energy and Labour Department of the Government of Maharashtra has extended the Maharashtra IT/ITeS Policy 2009 (which had expired on 14 August 2014) for a further period up to the coming into force of the new policy on 31 March 2015 with retrospective effect from 15 August 2014.

Notification No. मातंधो-2014/(प्र.क्र. 136)/उद्योग-2 (िशकाना) dated 19 December 2014

• The Government has furnished Draft Maharashtra’s IT/ITES – 2015 in January 2015.

Karnataka

• The Karnataka Government has extended the time limit for the Revision option under e-Uploading of Purchase and Sales Statements (e-UPaSS) for the tax periods May 2014, June 2014, July 2014 and August 2014 for all targeted dealers till 31 March 2015. Revision of return and purchase and sales statements for tax period September 2014 will also end on 31 March 2015.

Circular No. 22/2014-2015 dated 30 December 2014

• The Karnataka Government has notified that every dealer registered under the CST Act and filing e-returns for any month/quarter commencing 1 January 2013 is to apply to obtain a declaration in Form ‘C,’ which is to be furnished for purchases in such month/ quarter, and a single declaration form covering all purchase transactions that took place in a month of the financial year between two dealers.

Notification No. CCW/CR 8/2013-14 dated 2 January 2015

Tamil Nadu

• The Tamil Nadu Government has clarified that recharge coupons/vouchers for mobile phone connections are not “goods” falling within the scope of the definition of “goods” under Section 2(21) of the TNVAT Act, and hence, not taxable under Section 3(2) of the TNVAT Act.

TNVAT AACAR No. 82/2014-2015 dated 3 December 2014

Assam

• The Office of the Commissioner of Taxes has notified a circular that specifies the documents to be produced by transporters of goods at checkposts/exit posts in the case of transshipment from Assam to the north-eastern states.

Notification No. CTMS-6/2007/384 dated 1 December 2014

• The Assam Government has issued a circular specifying the procedure for collection of Entry Tax on entry of specified goods (made through online sale or purchase) into local areas. It has dispensed with the requirement for road permits in such cases, subject to fulfilment of conditions specified in the circular.

Notification No. CTS-62/2014/53 dated 23 December 2014

Rajasthan

• Rajasthan’s Commercial Taxes Department has issued a clarificatory circular regarding mandatory electronic generation of statutory forms required under CST Rules, 1957. It clarifies that manually issued forms will not be used/issued except in specified circumstances and that rectification, if any, to be done in an e-generated form and should be filed within six months.

Circular No.16 [F.16(95) Tax/CCT/14-15/3085] dated 12 December 2014

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• The Rajasthan Government has introduced a facility for e-refund in Form VAT-20. Application are to be submitted electronically for refund through the “rajtax” web portal.

Circular No.17 [F.16(95) Tax/CCT/14-15/5262] dated 8 January 2015

• The Rajasthan Government has announced its Amnesty Scheme, 2015 for taxpayers for waiver of interest and penalty. The scheme will apply to dealers against whom demand for tax was up to INR0.5 million before 31 March 2011 and is in dispute before an appellate forum.

Notification No. F. 12 (16) FD/TAX/2009-188 dated 9 February 2015

Uttarakhand

• The Uttarakhand Government has provided concessions in payment of tax on interstate sale of goods to manufacturing industrial units with their main places of business in Uttarakhand, subject to certain conditions.

Notification No.98/2015/181/(120)/XXVII(08)/08 dated 20 January 2015

Meghalaya

• The Meghalaya Government has amended Schedule IV of the Meghalaya Value Added Tax Act, 2003. It has revised the residuary tax rate to 14.5% (including that on works contracts and lease transactions).

Notification No. ERTS(T)7/2014/61 dated 22 January 2015

Himachal Pradesh

• The Himachal Pradesh Government has amended Section 16 of the Himachal Pradesh Value Added Tax Act, 2005. It has inserted provisions for revised returns and penalties in case of failure to furnish returns within the specified due date.

The Himachal Pradesh Value Added Tax (Amendment) Act, 2014

• The Himachal Pradesh VAT department has issued a notification whereby no input tax credit is to be allowed on tobacco and tobacco products if sold in the course of inter-state trade and commerce or sent outside the state other than by way of sale.

Notification No. EXN-F(1)-7/2012 dated 16 December 2014

Odisha

• Dealers registered in Odisha, whose gross turnover exceeds INR0.1 million in respect of any particular year will need to have their accounts audited in respect of that particular year as per the provisions of the Odisha VAT Act. The notification is to come into effect from 1 April 2015.

Notification No. III(III)14/2012/2250/CT dated 11 February 2015

• The Commercial Taxes Department of Odisha has issued a clarificatory circular on the issue of the measure of tax levied under the Odisha Entry Tax Act and Odisha VAT Act in the case of manufacturers. It has addressed the issue arising out of definition of “purchase value” in both the respective Acts.

Circular No. 2350/CT/III(I)47/07 dated 13 February 2015

Delhi

• Delhi VAT Department has notified the State Bank of Bikaner and Jaipur, located in the National Capital Territory of Delhi, as the “Appropriate Government Treasury” to collect tax, interest, penalty and any other amount due under the VAT/CST Act.

Notification No. F7(400)/Policy/VAT/2011/600-612 dated 17 December 2014

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55 Tax Digest

Chhatisgarh

• The Chhatisgarh Government has issued a notification to extend the due date in of completion of assessment for any financial year (which was required to be completed by 31 December 2014) to 30 September 2015.

Notification No. F-10-78/2014/CT/V(86) dated 31 December 2014

Miscellaneous

Tax Administration Reform Commission submitted third report on 30 November 2014.

• The Tax Administration Reform Commission (TARC), headed by Dr. Parthasarathi Shome, submitted its third report to the Ministry of Finance. The report emphasized on the need for impact assessment, which involves a systematic study of potential tax actions to be taken by the Government, widening of the tax base to assist the growth of tax revenue and optimization of tax compliance management to minimize compliance-related risks.

• The TARC report also emphasizes the need for the Centre and the states to work together with a high degree of coherence and co-ordination to implement the GST.

Constitution (122nd Amendment) Bill, 2014 tabled in Lok Sabha on 19 December 2014

• The Central Government introduced the revised draft Constitution (122nd Amendment) Bill, 2014 in the Lok Sabha on 19 December 2014 to introduce the GST in India. The earlier Constitution Amendment Bill for GST lapsed with the dissolution of the previous Lok Sabha. The salient features of the current Bill inter alia includes the following:

• Conferring concurrent taxing powers to the Union and state governments

• Subsuming major indirect taxes levied by Union and State Governments

• Providing for levy of GST on supply of all goods and services, except alcohol, for human consumption

• Including petroleum products under GST at a future date

• Forming the GST Council and entrusting it with the responsibility of making recommendations on all key aspects of the levy

• Making special provisions for levy of additional tax on supply of goods accruing to the origin state

• Compensating states in cases of loss of revenue after their introducing GST

Policy framework for Finance Special Economic Zones submitted on 6 February 2015

• The National Institute of Public Finance and Policy (NIPFP) has submitted a concept note to the Ministry of Finance, detailing the objectives and policy framework for setting up finance SEZs in India. The concept note highlights steps and short-term actions that could be adopted to start a Finance SEZ.

Fourth and final report submitted by Tax Administration Reform Commission on 20 February 2015

• The fourth and final report of The Tax Administration Reform Commission provides for approaches to be followed for tax administration inter alia such as revenue-forecasting models using quantitative methods, the use of predictive analysis and automation, sharing of information between the CBDT and the CBEC, and recommendations for effective tax governance research.

Fourteenth Finance Commission Report dated 24 February 2015

• The Fourteenth Finance Commission, led by Dr. Y. V. Reddy (former Governor of Reserve Bank of India), has presented its report to the Parliament. The report suggested the major step of devolution of 42% of

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56 Tax Digest

the Centre’s revenue to the states, compared to 32% suggested by the previous Commission’s report. This will enable states to have greater autonomy and flexibility in their finances.

• The report also recommends creation of an “autonomous and independent GST compensation fund” to compensate state governments during roll out of the GST regime. The Commission recommended that compensation to the states can be offered in a phased manner on the lines of VAT.

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57 Tax Digest

Foreign Direct Investment (FDI) Policy

RegulatoryDepartment of Industrial Policy & Promotion (DIPP)

Mapping sectors in the FDI policy with NIC 2008

The DIPP has issued Press note 1 of 2015, aligning respective sectors stated under the Consolidated FDI policy issued by it with their relevant National Industrial Classification (NIC) 2008. The move has been made to ease doing business in India. The policy will be referred to while making filings/representation before the regulator(s).

Source: DIPP Press note 1 of 2015 dated 05 January 2015.

Review of FDI policy in the pharmaceutical sector – carve out for medical devices

The DIPP has revised the existing FDI policy for the pharma sector. Accordingly, it has introduced automatic route for FDI of up to 100% in the medical devices segment. The clause was made effective in the rest of the sector from 21 January 2015 onward.

Source: DIPP Press note 2 of 2015 dated 06 January 2015.

Reserve Bank of India (RBI)

Reporting under FDI scheme on the e-Biz platform

The RBI has eased the reporting requirements of FDI transactions, enabling the filing of the following returns through the e-Biz portal once digitally signed by the concerned customer:

• Advance Remittance Form (ARF) — used by companies to report FDI inflow to the RBI; and

• FC-GPR form — submitted by a company to the RBI for reporting the issue of eligible instruments to an overseas investor against the FDI inflow mentioned above.

The services were made operational on the e-Biz platform from 19 February 2015 onward. This is an additional facility for Indian companies, implying that the manual system of reporting would continue until further notice.

Source: A.P (DIR Series) Circular No.77 dated 12 February 2015

Alignment of FDI policy by the RBI

The RBI has incorporated the changes announced by the DIPP in sectoral classification/conditionalities in its Consolidated FDI Policy to bring uniformity in FEMA Regulations. The RBI has issued various circulars introducing similar amendments in Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (“principal regulations”).

In this respect, changes/liberalization introduced by the DIPP on railway infrastructure, defence, construction and development, and medical devices have been appropriately incorporated in Annex B of Schedule 1 of the Principal regulations.

Source: A.P.(DIR Series) Circular No.47, A.P. (DIR Series) Circular No. 46, A.P.(DIR Series) Circular No.45 dated 08 December 2014, A.P. (DIR Series) Circular No. 60 dated 22 January 2015 and A.P.(DIR Series) Circular No.70 dated 02 February 2015 respectively; Refer Tax Digest December 2014 and Tax Digest September 2014

Indian Insurance Companies (Foreign Investment) Rules, 2015

The Ministry of Finance has notified rules on foreign investment in Indian insurance companies up to 49%, with the following key features:

• An Indian insurance company will ensure that ownership and control shall always remain with Indian entities;

• FDI of up to 26% shall be permitted under the automatic route;

• FDI of above 26% and up to 49% shall be allowed, subject to obtaining an approval from the FIPB; and

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58 Tax Digest

• Foreign equity investment cap of 49% shall apply on the same terms as listed above to insurance brokers, third party administrators, surveyors and loss assessors and other insurance intermediaries appointed under the provisions of the Insurance Regulatory and Development Authority Act,1999

Source: Ministry of Finance Notification dated 19 February 2015

Overseas investments by Alternative Investment Funds (AIF)

The RBI has permitted an AIF, registered with Securities and Exchange Board of India (SEBI), to invest overseas. In this respect, it will need to be compliant with the same provisions as domestic venture capital funds registered with the SEBI.

Source: A.P.(DIR Series) Circular No.48 dated 09 December 2014

Overseas Direct Investments (ODI) by Indian party – rationalization/liberalization

Further liberalizing ODI regulations, the RBI has permitted the creation of charge on the shares of step down subsidiary (SDS) of an Indian party, subject to certain conditions. Additionally, the said facility can be secured for funding, to be availed by a group company or sister concern or associate concern or by SDS, under the automatic route, subject to specified conditions. Furthermore, the creation of charge on any property of the Indian party or a group company in favor of a non-resident entity has been bought under the automatic route. Moreover, AD banks are permitted to create charge on the overseas assets of the JV/WOS/SDS (irrespective of the level) of an Indian party in favor of a domestic lender for securing the facility to be availed by the Indian party or by its group companies/sister concerns/associate concerns or by any of its overseas JV/WOS/SDS (irrespective of the level), subject to specified conditions.

Source: A.P. (DIR Series) Circular No.54 dated 29 December 2014.

ODI by proprietorship concern/unregistered partnership firm in India

Keeping in view changes in the definition/classification of exporters as per the FDI Policy of the Ministry of Commerce and Industry, the policy framework for ODI by a proprietorship concern/unregistered partnership firm in India has been reviewed. Accordingly, revised terms and conditions have been issued. A proprietorship concern/unregistered partnership firm in India is required to comply with these for consideration of their proposal of ODI by the RBI under the approval route.

Source: A.P. (DIR Series) Circular No. 59 dated 22 January 2015

Proposal for enhancement in the limit under Liberalized Remittance Scheme (LRS)

In its bi–monthly monetary policy, the RBI has proposed to increase the limit under the LRS from the existing US$125,000 to US$250,000 for each financial year. The proposed limit shall subsume all payments made under Schedule III to Foreign Exchange Management (Current Account Transactions) Rules 2000. Furthermore, it allows the acquisition of immovable property abroad from remittance made under the LRS.

Source: Bi-monthly monetary policy of RBI dated 3 February 2015

Expansion in options of securities for External Commercial Borrowings (ECB)

The RBI has allowed AD banks to create charge on immovable and movable assets in favor of an overseas lender to secure ECB, subject to the following key conditions:

• No objection certificate, wherever necessary, from the existing lenders in India has been obtained.

• In the event of enforcement/invocation of the charge, the immovable asset will have to be sold only to a person resident in India, and the sale proceeds shall be repatriated to liquidate the outstanding ECB.

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59 Tax Digest

• The claim of the lender, whether the lender takes over the movable asset or otherwise, will be restricted to the outstanding claim against the ECB. Furthermore, encumbered movable assets have now been permitted to be taken out of the country.

• The ambit of charge on financial security has been widened to include bond and debentures, government securities, government savings certificates and units of any mutual funds standing in the name of ECB borrower/promoter.

• Security interest over all current and future loan assets and all current assets, including cash and cash equivalents, such as Rupee accounts (including in the form of escrow arrangement or debt service reserve account) of the borrower with AD banks, standing in the name of the borrower/promoter has now permitted.

Source: A.P. (DIR Series) Circular No. 55 dated 01 January 2015

Multiple rescheduling of ECB now permitted

Simplifying the existing procedure for rescheduling/restructuring of ECBs, the RBI has delegated power to AD banks to allow:

• Changes/Modifications (irrespective of the number of occasions) in the draw-down and repayment schedules of the ECB whether associated with a change in the average maturity period or not and/or with changes (increase/decrease) in the all-in-cost

• Reduction in the amount of ECB (irrespective of the number of occasions), along with any changes in draw-down and repayment schedules, average maturity period and all-in-cost

• Increase in all-in-cost of ECB, irrespective of the number of occasions

The above is subject to the AD bank ensuring the following:

• Revised average maturity period and/or all-in-cost is/are in conformity with the applicable ceilings/guidelines; and

• Changes are effected during the tenure of ECB

Source: A.P. (DIR Series) Circular No.64 dated 23 January 2015

RBI’s check on delay in utilization of advance received for exports

As per relevant provisions under FEMA, an exporter receiving an advance payment for exports from a buyer outside India is under an obligation to ensure shipment of goods within the stipulated period from the date of receipt of advance payment. However, the RBI’s records suggest a substantial increase in the number and amount of advances received for exports remaining outstanding beyond the stipulated period on account of non-performance of such exports (shipments in case of export of goods). Thus, AD banks have been advised to efficiently follow up with the concerned exporters to ensure that export performance (shipments in case of export of goods) is within the stipulated time period. Doubtful cases, as well as instances of chronic defaulters, may be referred to the Directorate of Enforcement (DoE) for further investigation.

Source: A. P. (DIR Series) Circular No.74 dated 09 February 2015

Import of goods into India

Presently, under FEMA, provision applications by persons, firms and companies for making payments exceeding US$5,000 or its equivalent toward imports into India were to be made in Form A-1. Simplifying these procedures, the RBI has decided to dispense with the requirement of submitting request in the form. AD banks may, however, need to obtain all the requisite details from importers about the bonafides of the transactions before effecting the remittance.

Source: A. P. (DIR Series) Circular No.76 dated 12 February 2015

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60 Tax Digest

Remittance of salary to employee deputed to an Indian Group company

The RBI has recently informed that the facility of remittance of salary available to an employee of a company (as discussed under Regulation 7(8) of Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations 2000) shall also be available to an employee who is deputed to a group company in India. In addition, the definition of the term “company” in the aforementioned regulation has been expanded to include “Limited Liability Partnership” as defined in the LLP Act, 2008.

Source: A.P. (DIR Series) Circular No.62 dated 22 January 2015

Depository Receipts Scheme

The Central Government has notified a new scheme, Depository Receipts Scheme, 2014 (DR Scheme, 2014), for investments under ADR/GDR. The scheme is effective from 15 December 2014 and provides for the repeal of extant guidelines for Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993, except to the extent relating to foreign currency convertible bonds.

Source: A.P. (DIR Series) Circular No. 22 dated 10 January 2015

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61 Tax Digest

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

In the pressBudget 2015: We don’t need big bang policiesDK Srivastava and Shalini Mathur, Hindu Business Line

Budget 2015: Bring a settlement scheme to check tax disputesSudhir Kapadia, Financial Express

Budget 2015: Constitution bill sows seeds of fractious federalism.Satya Poddar, Mint

Budget 2015: Let industry also shape GST regime- Harishanker Subramaniam, Financial Express

Budget 2015: ‘Make in India’ and GST could be match winners Suresh Nair, DNA

Budget 2015: Bold steps in BFSI to ensure economic growthAbizer Diwanji, Moneycontrol.com

Budget 2015: Telecom wants clarity on withholding tax issues Garima Pande, Moneycontrol.com

Budget 2015: Opinion: Income Tax Exemption Must Be Hiked to 5 Lakh Shalini Jain, NDTV Profit.com

Budget 2015: Opinion: Clarity on GST is Keenly Awaited Abhishek Jain, NDTV Profit.com Budget 2015: Opinion: Jaitley Should Consider Excise Duty Cut for Auto SectorSarika Goel, NDTV Profit.com

Budget 2015: Opinion: Jaitley Should Provide Tax Certainty to InvestorsJaiman Patel, NDTV Profit.com

Budget 2015: Opinion: Retail Industry Eyeing Big Bang Reforms Hema Palgamkar, NDTV Profit.com

Budget 2015: Opinion: MAT on Infrastructure Companies Should Be AbolishedShashidhar Upinkudru, NDTV Profit.com

Budget 2015: Opinion: Telecom Industry Eyes Reforms for Digitising India Sanjay L Kapadia, NDTV Profit.com

Budget 2015: Education Sector Needs Tax Benefits for Knowledge HubsPrasanna TA and Roshan Samuel, NDTV Profit.com

Budget 2015: Strike right balance between ‘Achche din’ hopes and fiscal prudence Pramod Achuthan, DNA

Budget 2015: Leather, textiles need a leg upB Sriram, Hindu Business line

Budget 2015: Budget 2015-16: Boost to Oil & Gas required for energy securitySanjay Grover and Isha Shah, Moneycontrol.com

Budget 2015: ‘Acche Din’ for the Education SectorRavi Mahajan, Moneycontrol.com

Budget 2015: Infrastructure & real estate need booster doseGaurav Karnik, Moneycontrol.com

Budget 2015: Technology sector needs a shot in the arm, Krishna Kumar, Moneycontrol.com

Budget 2015: Time to bring transparency & certainty on deals streetDeepa Dalal, Moneycontrol.com

Budget 2015: Time to gear up tax regime for outbound investmentsRaju Kumar, Moneycontrol.com

Budget 2015: These tax proposals can change M&A landscape in IndiaAmrish Shah, Moneycontrol

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62 Tax Digest

Budget 2015: Recommendations of the 14th Finance Commission will change basic architecture of Centre-state fiscal tiesDK Srivastava, The Economic Times

Budget 2015: Upstream PSUs look for clarity on subsidy Raju Kumar, The Financial Express

Budget 2015: Key Expectations from Union Budget 2015Sunil Kapadia, Taxsutra

Budget 2015: ‘Indirect’ Expectations from Union Budget 2015.Heetesh Veera, Taxsutra

Budget 2015: Remove surcharges and cess, tax corporates moderatelySamir Kanabar, Moneycontrol.com

Budget 2015: Time to open doors for investments with tax reformsPrashant Khatore, Moneycontrol.com

Budget 2015: Here is how NRI income is taxed in IndiaSurabhi Marwah, Moneycontrol.com

Budget 2015: Indirect Tax: major reforms that need clarity in the budgetBipin Sapra, Moneycontrol.com

Budget 2015: Income Tax: What can you expect from Budget 2015Amarpal S Chadha – Moneycontrol.com

Towards an effective Indo-US social security agreementAmarpal S Chadha - The Financial Express

Need to revisit tax norms for CSR spendsRajiv Chugh - The Financial Express

Don’t join rush, pay tax in advanceAmarpal S Chadha - The Financial Express

X’mas, Good Governance & “Fringe Benefits”Sudhir Kapadia – CNBC website

No further time to be lost on GSTHarishanker Subramaniam - Hindu Business Line

Advance Tax: It’s time for second instalmentRama Karmakar – The Financial Express

Avoiding another VodafoneParesh Parekh – Business Standard

Record cafe: States not prepared for GST, 27% rate can’t workSatya Poddar – The Financial Express

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63 Tax Digest

Direct Tax

Compilation of Tax Alerts

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

1. Ruling of the Mumbai Tribunal on scope of international transaction and deemed international transaction for applicability of transfer pricing provisions

16 December 2014

Vodafone India Services Pvt. Ltd. V. Assistant Commissioner of Income Tax [TS-422-ITAT-2014(mum)-TP]

2. Delhi Tribunal rules on carry forward of business loss in intra-group change in shareholding

20 December 2014

Yum Restaurants (India) Pvt. Ltd. v. ITO [TS-755-ITAT-2014(DEL)]

3. Social security agreement between India and Australia

7 January 2015 Social Security Agreement signed between India and Australia

4. Andhra Pradesh HC rules on no double taxation under MAT provisions

8 January 2015 CIT v. Nagarjuna Fertilizers and Chemicals Ltd. [2014] 52 taxmann.com 397 (Andhra Pradesh)

5. Jabalpur Tribunal rules on interplay between provisions of PE and FTS for taxing installation/commissioning activities in composite contract

9 January 2015 Birla Corporation Ltd. v. ACIT [TS-790-ITAT-2014(Jab)]

6. SEZ Rules amended to allow dual use of Non Processing Area by both SEZ entities and DTA entities

12 January 2015 Notification dated 2 January 2015 issued by the Ministry of Commerce & Industries (Department of Commerce) (MoC) amending the SEZ Rules, 2006

7. Mumbai ITAT rules Service PE created by activities of employees deputed to India, not taxable as FIS

14 January 2015 Morgan Stanley International Incorporated v. DDIT [TS-775-ITAT-2014]

8. CBDT releases revised draft of Income Computation and Disclosure Standards for public comments

16 January 2015 Key changes made in the revised draft of Income Computation and Disclosure Standards released by the CBDT on 9 January 2015, as compared to an earlier draft of October 2012.

9. Global Tax Alert - US and India Tax Authorities agree on framework for resolving certain double tax cases

29 January 2015 Meeting of US and India tax officials on 15-16 January 2015 in Delhi for resolving pending double tax cases involving information technology enabled services (ITeS) and software development

10. HR and Tax Alert - Social Security Agreement between India and Norway enters into force on 1 January 2015

29 January 2015 The 2010 Social Security Totalization Agreement between India and Norway

11. Mumbai ITAT explains distinction between “sale” and “right to use” capacity in telecom cable network

10 February 2015 [ITA Nos. 6254/Mum/2003, 1168 & 6710/Mum/2004]

12. CBDT clarifies no interest levy for delay in furnishing tax return if tax is paid before due date for filing tax return

11 February 2015 CBDT Circular No. 2/2015 dated 10 February 2015

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64 Tax Digest

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

13. CBDT clarifies on the quantum of disallowance for failure to withhold taxes at source on payments to a non-resident

13 February 2015 CBDT Circular No. 3/2015 dated 12 February 2015

14. Mumbai Tribunal rules Indian subsidiary carrying out outsourced functions of Swiss re-insurance company does not create a PE

17 February 2015 Swiss Re-Insurance Co Ltd. v. DDIT [TS-55-ITAT-2015(Mum)]

15. SC rules that an “advice/opinion” constitutes “consultancy services” and is taxable as fees for technical services

20 February 2015 GVK Industries Ltd. [Civil Appeal No. 7796 of 1997]

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65 Tax Digest

Indirect Tax

S. No.

Title Date of the alert Citation/Notification/Circular

1. GST News Alert 10 December 2014 Key GST updates based on newspaper/online media reports

2. Tribunal allows CENVAT credit on Outdoor Catering Services for employees (to the extent cost is borne by the Company) post the April 2011 amendment of the definition of ‘input services’

11 December 2014 Hindustan Coca Cola Beverages Pvt. Ltd. v. CCE [2014-TIOL-2460-CESTAT-Mum]

3. GST News Alert 17 December 2014 Key GST updates based on newspaper/online media reports

4. Analysis of the Constitution Amendment Bill for introduction of Goods and Service Tax

20 December 2014 Constitution (122nd Amendment) Bill, 2014 for ushering in Goods and Services Tax tabled in the Lok Sabha on 19 December 2014, post its approval by the Union Cabinet

5. Delhi HC allows SFIS incentive to Indian subsidiaries of foreign companies; quashes DGFT/PIC interpretation

2 February 2015 Yum Restaurants (I) Pvt. Ltd v. Union of India and OrsNokia Solutions and Networks India Pvt. Ltd & Anr v. Union of India and OrsEI Dupont India Pvt. Ltd. & Anr v. Union of India and Ors[TS-13-HC-2015(DEL)-FTP]

6. Supreme Court validates the State Government’s right to levy sales tax on processing and supplying of photographs

5 February 2015 State of Karnataka Etc v. Pro Lab & Others Etc.[2015-TIOL-08-SC-CT-LB]

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66 Tax Digest

Regulatory

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

1. SEBI discussion paper on reclassification of promoters as public shareholders

6 January 2015 SEBI discussion paper released on 30 December 2014 on ‘Re-classification of Promoters as Public’

2. Central Government notifies the Depository Receipts Scheme 2014 for facilitating issue of Depository Receipts outside India

12 January 2015 Depository Receipts Scheme 2014 , notified by the Central Government w.e.f 15 Dec 2014

3. The Government of India notifies rules in respect of foreign investment in Indian insurance companies

24 February 2015 Notification F. No. 12018/1/2006-Ins. IV dated 19 February 2015

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