Tax DigestQuarterly newsletterMarch 2016

2 Tax Digest

Dear readers,Dear readers,

We are pleased to present the March 2016 edition of EY’s quarterly newsletter, Tax Digest, which summarizes significant tax and regulatory developments for the January to March quarter.

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

We hope you find this edition, both timely and insightful.

Best regards, EY Tax Update team

Click to navigate

Direct tax• Verdicts

• Reported decisions supported by our Litigation team

• Penalty payment to US Court not liable for tax withholding

• Pre-incorporation expenses incurred by an associated enterprise not taxable as perquisite/benefit

• Service tax not includible while determining presumptive income

• Significant Supreme Court decisions

• Land under construction is liable to Wealth tax

• Settlement at net present value of Sales tax deferral liability not income

• Grant of development rights amounts to transfer

• Issues related to presumptive taxation

• No presumptive taxation when incurring losses

• Characterization of expenditure: revenue v. capital

• Pune Tribunal allows product-R&D expense as “revenue”

• HC holds stamp-duty payment for long-term land lease as “revenue” in nature

3 Tax Digest

• Ruling on taxability of income

• Tax withholding not required for payment made by foreign branches for business carried outside India

• Tribunal applies non-discrimination clause while ruling no tax withholding requirement on payment to NR

• Whether an abusive transaction?

• Delhi HC rules on tax avoidance in terms of gain arising from share sale and renunciation of “right to subscribe” the debentures

• Buy-back followed by capital reduction is not “corporate re-organization” under India-Netherlands DTAA

• Other significant decisions

• Income-linked deduction available in respect of other income connected with export business

• Amount received for not sharing knowledge/expertise is capital receipt, not taxable under ITL

• Transfer of subsidiary’s shares does not amount to “slump-sale” of undertaking

• Delhi Tribunal allows deduction for free medical samples given to doctors

• Is there a PE?

• Delhi High Court rules on computation of threshold for Construction PE

• Mumbai Tribunal rules US-television company’s Indian distributor creates Dependent Agent PE

• Some key issues where Special Leave Petition (SLP) accepted by the SC

• 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

• CBDT announces changes to compulsory quoting of permanent account number (PAN) rules with effect from 1 January 2016

• CBDT reiterates non-applicability of MAT to foreign companies

• CBDT amends rules relating to furnishing information in respect of payments to NRs

• CBDT clarifies on non-applicability of concealment penalty on additions made under normal provisions for cases under MAT assessment

• CBDT issues draft guidelines for determination of Place of Effective Management (POEM) for corporate residency

• Treaty updates

• The 2015 DTAA between India and Thailand came into force

• Memorandum of understanding (MoU) to 1985 India-Korea DTAA

• 2015 Protocol to 1989 India-Japan DTAA

• 2015 Protocol to amend 1997 India-Belarus DTAA came into force

4 Tax Digest

• Happenings across the border

• Turkey imposes obligation on certain taxpayers to provide info on e-commerce and other business activities

• Thirty-one countries sign tax cooperation agreement enabling automatic sharing of country-by-country reporting information

• European Commission releases anti-tax avoidance package designed to provide uniform implementation of BEPS measures and minimum standards across Member States

• Saudi Arabian Government clarifies Service PE concept

Indirect taxCase lawsCustoms duty

• Supreme Court

• When main order is not challenged and only the review order is challenged, SC held that it is not obliged to allow SLP

• High Court

• Simultaneous penalties on partners and firm held to be unsustainable

• Quashing DGFT clarification, HC held that no cap on Incremental Export Incentivisation Scheme (IEIS) scrip value and subject to scrutiny

• HC quashes circulars denying cash refund of 4% SAD paid through DEPB scrips

• SCN upheld on the ground that date of knowledge of mis-declaration not relevant, instead, date of clearance of goods under a BoE which contained such mis-declaration and/or undervaluation held to be relevant date

• Refund of Customs duty paid by SEZ units is governed by Section 27 of Customs Act, thus refund claims by SEZ units would lie before Customs Authorities and not before SEZ authorities in terms of the SEZ Act or Rules

Excise duty

• Supreme Court

• Onus is on Revenue to prove that notional interest on advances received had an effect of reducing the sales price

• High Court

• Period of limitation not applicable in case of refunds claimed for duty paid under protest

• Authority for Advance Rulings (AAR)

• Proposed activity of repair and maintenance of equipment undertaken by passive telecom infrastructure provider does not amount to manufacture; CENVAT Credit of Excise duty paid on parts and spares of capital goods and Service tax paid on inspection, certification and engineering services admissible to such passive telecom service provider

• Activities such as inspection, testing and installing batteries, activities relating to spectacles and frames, freebies, tagging, etc. do not amount to manufacture or deemed manufacture

5 Tax Digest

• Tribunal

• Installation and commissioning charges for installation of goods at customer’s premises not includable in assessable value.

Service Tax

• Authority for Advance rulings

• Salary and allowance paid by Indian subsidiary to a deputed employee who is on the rolls of the foreign holding entity will not attract Service tax

• Provision of car lease to employees in the course of employment will not amount to service and thus will not be subject to Service tax

• Tribunal

• Supervision of erection and commissioning of plant, as a part of supply agreement, and provided free of cost will not constitute a service and accordingly will not be liable to Service tax

• Package tours for air travel and hotel accommodation offered by an airline will not amount to tour operator services

• Royalty received by the port for allowing company to undertake construction and operation of terminal on BOT basis will be leviable to Service tax under “Port Service”

CENVAT credit

• High Court

• CENVAT credit cannot be denied due to procedural lapse of not applying for registration as input service distributor

• Tribunal

• CENVAT credit admissible in respect of commission paid to overseas agents

• Turnover with respect to onsite services will be considered under export turnover as well as total turnover for the purpose of computing refund under Rule 5 of CCR

VAT/CST

• High Court

• Mobile phone charger is an accessory for mobile phone and is not its part

• Disposal of repossessed cars by the Bank on account of default in repayment of car loan constitutes a sale under the Delhi Sales Tax Act, 1975 (DST)

• Transfer of right to use goods in the same form is considered as a sale under CST and VAT

• In absence of revised returns, contractor cannot claim higher deduction of land cost vis-a-vis original returns

Key statutory updates

• Customs

• Foreign Trade Policy 2015-2020

6 Tax Digest

• Notification/Circulars

• Trade Notices/Public Notices

• Press Release

• Central Excise

• CENVAT credit

• Goods and Services Tax (GST)

• Service Tax

• VAT

Regulatory Foreign Exchange Management Act (FEMA) 1999

• Amendments in Foreign Exchange Management (Transfer or Issue of Security to a person resident outside India) Regulations, 2000

• Amendments in Foreign Exchange Management (Transfer or Issue of Security to a person resident outside India) Regulations, 2000 pursuant to Press Note 12 of 2015

Foreign Direct Investment Policy

Reserve Bank of India (RBI)

• Regulatory relaxations in respect of start-ups

• Clarifications with respect to accepting payment on behalf of overseas subsidiaries of start-ups under the existing FEMA regime

• RBI issued revised principal regulations on different subjects under FEMA

• Settlement of export/import transactions permitted in currencies not having direct exchange rate

• Mandatory filing of Form FCTRS, FCGPR and ARF on e-Biz platform and discontinuation of physical filing w.e.f. 8 February 2016

• RBI replaces master circulars with master directions to be issued annually during the month of January

In the press

Compilation of alerts

• Direct Tax

• Indirect Tax

• Regulatory

7 Tax Digest

What’s new Useful links

(Click to navigate)

Budget 2016

Base Erosion and Profit Shifting (BEPS)

Swachh Bharat Cess; Webcast

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

Budget webcast

Tax Insights magazine

Goods and Service Tax

India Tax Webcast Series

Tax Library

Follow us on Social Media:

EY India Tax Insights Linkedin GroupIndia Tax Insights Blogwww.ey.com

8 Tax Digest

Verdicts!

Direct taxReported decisions supported by our Litigation team

Penalty payment to US Court not liable for tax withholding

In the case of Satyam Computer Services Ltd. [TS-696-AAR-2015], the issue before the Authority for Advance Rulings (AAR) was whether withholding was required under the Income Tax Law (ITL) for payment of penalty made to the US Court. The taxpayer’s shares were listed on the US stock exchange. A complaint was filed with the US court as a result of scam in India. Without admitting or denying allegations in the complaint, the taxpayer agreed to pay as penalty an amount of US$10m. The AAR held that the penalty ordered by the US Court did not require tax withholding, since the payment is not a sum chargeable to tax under the ITL.

Pre-incorporation expenses incurred by an Associated Enterprise not taxable as perquisite/benefit

In the case of Jefferies India Pvt. Ltd. [ITA No - 3238 /Mumbai/2014], the taxpayer had debited pre-incorporation expenses, which were actually incurred by its Associated Enterprise (AE) for the taxpayer. The tax authority claimed that these pre-incorporation expenses constitute taxable perquisite/benefit in the hands of the taxpayer. The First Appellate Authority (FAA) held that the AE of the taxpayer incurred the expenses prior to commencement of business of the taxpayer and, hence, cannot be treated as taxable income of the taxpayer. The FAA further relied on the decision of the Delhi High Court (HC) in the case of CIT v. State Trading Corporation of India Ltd. [92 ITR 294], which held that, the grant-in-aid received by a taxpayer prior to the commencement of its business cannot be said to arise from its business. The FAA, held that even if the referred expenditure were to be considered as income in the hands of the taxpayer, it will constitute a capital receipt and hence, not taxable under the ITL. The matter was taken to the Tribunal and the Tribunal agreed with the observations of the FAA and upheld its order.

Service tax not includible while determining presumptive income

In the case of Boskalis International-Dredging International CV (ITA No.4621/Mum/2014) the taxpayer was a Netherlands-based partnership firm. It was subcontracted by a foreign company for dredging and back-filing services in connection with the foreign company’s main contract with an Indian company to develop an offshore gas field. The issue before the Tribunal was whether the amount of Service Tax collected by the taxpayer is to be included while computing taxable income of the taxpayer on presumptive taxation basis. The Tribunal relied on the coordinate bench rulings in case of Marubeni Corporation [44 taxman 22] and Islamic Republic of Iran Shipping Lines [46 SOT 101] wherein it was held that Service Tax does not include any element of profit and, hence, is not to be included in total income. Moreover, drawing support from the Central Board of Direct Taxes (CBDT) circular no. 4/2008, the Tribunal held that service tax in not in the nature of income and, hence, service tax collected by the taxpayer did not qualify as income and should not be included in the amount on which the rate of presumptive tax is to be applied.

Significant Supreme Court rulings

Land under construction is liable to Wealth tax

In the case of Giridhar G. Yadalam v. Commissioner of Wealth Tax [TS-758-SC-2015], the taxpayer was a co-owner of land and had entered into various development agreements for construction of residential flats. However, the taxpayer had retained ownership of land until the flats were fully constructed. The Supreme Court (SC) considered whether such land should be excluded from the definition of “urban land” under the Wealth Tax Act. The SC held that a plain reading of the exclusion provision suggests that the exemption is with respect to land, which is occupied by a fully-constructed building (i.e., land where a building is under construction is not covered). Hence, the exclusion does not apply and the taxpayer is liable to Wealth Tax.

(For more details refer EY Alert dated 11 January 2016)

9 Tax Digest

Settlement at net present value of Sales tax deferral liability not income

In the case of CIT v. SI Group India Ltd. [TS-703-SC-2015], the taxpayer was permitted under an incentive scheme to retain sales tax collected for a specific period and pay the same in five instalments after 10 years without any interest. However, before the expiry of 10 years, the taxpayer paid an equivalent amount at net present value (NPV) to an accredited agency in settlement of its deferral liability. The issue before the SC was whether the difference between NPV and deferred sales tax liability was chargeable to tax as benefit obtained by way of remission or cessation of trading liability. The SC ruled in favor of the taxpayer. The SC accepted the argument of the taxpayer that even the sales tax authority did not accept the payment to accredited agency as valid settlement and raised demand for the balance amount. This showed that the taxpayer’s liability did not cease and, hence, there was no remission or cessation of trading liability which could be brought to tax in the taxpayer’s hands.

Grant of development rights amounts to transfer

In the case of Unitech Ltd. & Anr v. Union of India [TS-639-SC-2015], the taxpayer had entered into an agreement for developing a leasehold land for a consideration. The taxpayer would transfer a part of the developed land to the leaseholder of the land (22%) and would retain the balance (78%). The issue before the SC was whether this arrangement resulted in transfer of property in land to attract capital gains provision under the ITL to acquire land on pre-emptive basis where apparent consideration declared in the agreement to transfer the property is less than the fair market value by a margin of 15%.

The SC held that the arrangement was merely grant of licence to the developer and did not amount to sale, lease or exchange within the classical meaning of “transfer”. However, due to the specific extended definitions of “immovable property” and “transfer” under the ITL and having regard to the fact that the collateral agreement granted the taxpayer the right of development, enabling enjoyment of the property, the transaction was considered as “transfer” for the purposes of ITL. However the SC in its final conclusion, set aside the order of the Appropriate Authority on the ground of mistake in computing average rate of land per square feet.

Issues related to presumptive taxation

No presumptive taxation when incurring losses

In case of DIT v. Royal Jordanian Airlines [TS-709-HC-2015(Del)], the taxpayer was an airline company registered in Jordan. The taxpayer had been incurring losses globally as well as in India. The Delhi HC held that where there is no income, the provision of offering income on a presumptive basis cannot be applied to bring to tax the presumptive income constituting 5% of gross receipts. However, for this purpose, the taxpayer will have to produce books of accounts to substantiate that it has in indeed incurred losses.

Characterization of expenditure: revenue v. capital

Pune Tribunal allows product-R&D expense as “revenue”

In the case of DCIT v. Autoline Industries Ltd. [TS-690-ITAT-2015(PUN)], the taxpayer was engaged in the business of auto ancillary unit and manufactured automobiles parts for different automobiles manufacturers. Sometimes, the taxpayer was required to design a specifically useful product, which could only be used after it was approved by the automobile manufacturer. The taxpayer had received an amount for designing a specific product for an automobile manufacturer, which helped the automobile manufacturer to reduce the weight of its vehicles. The taxpayer claimed expenditure incurred in development of that new design, break assembly and related parts as deduction in the computation of total income while it was capitalized in its books. The tax authority contended that the said expenditure brought enduring benefit to the taxpayer and, hence, was capital in nature. Therefore, deduction could not be allowed on this. The Pune Tribunal observed that the break-up of the expenses reflected that major expenses were of purchase of raw material, i.e., steel and labor/salaries. The Tribunal held that even if enduring benefit was accorded by such expense, it was not incurred in the capital field and, hence, needs to be allowed as a deduction. The Tribunal further held that the accounting treatment given by the taxpayer in its books of account is not determinative of whether or not the expenditure is allowable as a deduction.

10 Tax Digest

HC holds stamp-duty payment for long-term land lease as “revenue” in nature

In the case of CIT v. Reliance Industrial Infrastructure Ltd. [TS-704-HC-2015(BOM)], the taxpayer took a land on lease for 30 years and claimed the stamp duty as revenue expenditure. The tax authority claimed that it was deferred revenue expenditure and needed to be spread over the entire life of the lease, i.e., 30 years. The Mumbai Tribunal held in favor of the taxpayer by relying on co-ordinate bench rulings in CIT v. Hoechst Pharmaceuticals Ltd. [113 ITR 877], CIT v. Cinecita (P.) Ltd. [137 ITR 652] and Richardson Hindustan Ltd. v. CIT [69 ITR 516].

The Bombay HC took note of the proceedings before the Tribunal and pointed out that the tax authority did not challenge the finding that expenses on account of stamp duty should be allowed as deferred revenue expenditure. Furthermore, the Tribunal relied on co-ordinate bench ruling in Cinecita Pvt. Ltd. to hold that period of lease could not be regarded as a decisive test to determine the nature of expenditure. The HC concluded that where it was not in dispute that stamp duty amount was paid on the lease deed for the purposes of carrying on taxpayer’s business, the amount of stamp duty paid has to be allowed as revenue in nature.

Rulings on tax withholding

Tax withholding not required for payment made by foreign branches for business carried outside India

In the case of NEC HCL System Technologies Ltd. v. ACIT [TS-28-ITAT-2016(DEL)], the taxpayer had a branch office in Japan (Japan BO) to undertake sales and marketing activities for its Indian operations. Vide an agreement between the taxpayer and a Japanese company (J Co), it was agreed that software development work, which could not have been serviced by the taxpayer/Japan BO will be subcontracted to J Co. J Co invoiced Japan BO for such work. Japan BO debited it as an outsourcing cost in its Profit & Loss account, which was consolidated with the audited financial statements of the taxpayer in India. The Tribunal held that, since expenses were borne by the Japan BO of the taxpayer for earning income outside India, no income was chargeable to tax in India under the provisions of the ITL and, hence, no withholding was required.

Tribunal applies non-discrimination clause while ruling no tax withholding requirement on payment to NR

In the case of ITO v. Santur Developers P. Ltd. [TS-724-ITAT-2015(DEL)], the issue before the Tribunal was whether tax withholding was required for payments made to a non-resident (NR) for acquisition of land. The taxpayer entered a collaboration agreement with three joint owners of the land, one of whom was an NR. The taxpayer paid the amount to the NR without withholding tax. The tax authority claimed that the taxpayer was obligated to withhold taxes since the payment was made to an NR. In view of such failure, the taxpayer was considered as liable to pay interest as the NR had subsequently paid tax in his individual capacity. The Tribunal ruled that the taxpayer was entitled to the non-discrimination clause of the India-US Double Taxation Avoidance Agreement. Since, at that point of time, there was no provision under the ITL requiring a payer to withhold taxes from sale proceeds of land payable to a resident, the taxpayer could not be burdened with the requirement of withholding tax in case of payment to an NR. Accordingly, there was no question of the taxpayer being made liable to pay interest due to the said non-withholding of tax.

Whether an abusive transaction?

Delhi HC rules on tax avoidance in terms of gain arising from share sale and renunciation of “right to subscribe” the debentures

In the case of Abhinandan Investment Ltd. [ITA 130/2001], an investment company, the issue before the Delhi HC was characterization of gains arising on sale of shares and also on whether the loss on renunciation of the right to subscribe debentures in favor of group concern was real loss available to be set off against such gains. On facts and after considering the intention and conduct of the taxpayer, the HC held that the gain on sale of shares and renunciation of rights to subscribe debentures is taxable as business income and not capital gains. Moreover, after taking into consideration the series of transactions entered into by the taxpayer, the HC opined that sale of rights was a colorable device intended to create artificial losses to reduce taxable profits. The loss was, therefore, not real but notional and, accordingly, upheld denial of the benefit of set off.

11 Tax Digest

Buy-back followed by capital reduction is not “corporate re-organization” under India-Netherlands DTAA

In the case of Accordis Beheer BV [TS-10-ITAT-2016(Mum)], the issue before the Mumbai Tribunal was whether transfer of shares by way of buy back of own shares by an Indian resident company followed by capital reduction under a scheme approved by the HC falls in the category of “re-organization” under the India-Netherlands DTAA. Where considered as a re-organization, the transaction will not be taxable in India. The Tribunal agreed that tendering of shares under an HC-approved scheme cannot be regarded as a colorable device. However, there should be a major change in the financial structure to qualify as reorganization. It should result in alteration of rights and interest of security holders. In the instant case, though there was a reduction of share capital, it was not a major change in its financial structure. Furthermore, the security holders continued to enjoy the same type of rights and interests even after reduction of share capital. Therefore, this transfer of shares under buy back could not fall within the ambit of the term “re-organization” under the DTAA to be exempt from taxation in India.

Other significant decisions

Income-linked deduction available in respect of other income connected with export business

In case of Riviera Home Furnishing v. ACIT [[2016] 65 taxmann.com 287 (Delhi)] the taxpayer was a 100% Export Oriented Unit (EOU) eligible for deduction of 100% of its profits derived from export of articles or things under the income-linked incentive provision of the ITL. The tax authority contended that the deduction will be available only in respect of so much of the income as was directly attributable to the business of export. The Delhi HC, relying on the ruling of Hritnik Exports [ITA Nos. 219 and 239 of 2014], held that once an income forms part of the business of the eligible undertaking of the taxpayer, it cannot be excluded from eligible profits. Accordingly, the taxpayer was eligible to claim deduction for export incentives, customer claims, freight subsidy and fixed deposit interest under the given fact pattern.

Amount received for not sharing knowledge/expertise is capital receipt, not taxable under ITL

In the case of Satya Kant Khosla v. ITO [TS-664-ITAT-2015(DEL)], the issue before the Tribunal was whether amount received for not providing benefit of knowledge of regulatory matters, negotiating skills and strategic planning expertise to any other person in India in the two wheeler segment for a period of two years is taxable under the ITL. The taxpayer had received a sum from a joint venture (JV) company (in which he was earlier the Managing Director (MD)), after stepping down as MD post cessation of the JV agreement.

The ITL provides for taxation of non-compete receipt as “profits in lieu of salary” (salary) or as business income depending upon certain circumstances. Although, the taxpayer was the MD of the payer-company, his role was that of a JV partner in the company and not an employee of the company. Hence, salary taxation was not attracted. Business income taxation provision was also not attracted, since its scope is restricted to non-compete payments received for not competing with the payer. In the present case, the amount is not paid for refraining from competing with payer but for not sharing knowledge, expertise, skills etc., with any other person in the two wheeler segment. Accordingly, the Tribunal held that the receipt is a capital receipt and not liable to tax.

Transfer of subsidiary’s shares does not amount to “slump-sale” of undertaking

In the case of UTV Software Communications Ltd. v. ACIT [TS-770-ITAT-2015(Mum)], the taxpayer was in the business of producing television programs, movies, air time sales and distribution of films. During the relevant year, the taxpayer transferred its entire shareholding in its 100% subsidiary to a third party. The tax authority contended that the gains will be computed according to the provisions applicable to slump sale. The Mumbai Tribunal observed that if the said transaction was a slump sale, the consideration should have been received by the subsidiary and not the taxpayer because it was the subsidiary company, which was transferred, and being a distinct legal entity, the subsidiary was entitled to the sale consideration of its transfer. However, this was not the case. Hence, this share transfer cannot be considered as slump sale of an undertaking under the provisions of the ITL.

12 Tax Digest

Delhi Tribunal allows deduction for free medical samples given to doctors

In the case of Eli Lilly & Co (India) Pvt. Ltd. v. ACIT [TS-680-ITAT-2015(DEL)], the taxpayer was engaged in the business of trading as well as marketing of drugs formulations used in the treatment of several diseases. The taxpayer claimed expenditure towards distribution of free samples to doctors/medical practitioners. This was disallowed by the tax authority on the basis that free distribution of samples constituted gifts or freebies, which are not allowable under the ITL on the basis of CBDT Circular No. 5/2012 read with Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (IMC Regulation). The Delhi Tribunal referred to the order of Dispute Resolution Panel (DRP) in the case of the taxpayer wherein such deduction was allowed by relying on the SC ruling in the case of Eskayef Pharmaceuticals [245 ITR 116] wherein it was explained that sample drugs are distributed in order to create awareness. The tax authority did not prefer an appeal against DRP order and, hence, ruled in favor of the taxpayer.

Is there a PE?

Delhi High Court rules on computation of threshold for Construction PE

In the case of National Petroleum Construction Company [TS-29-HC-2016(Del)], the taxpayer entered into a contract with an Indian enterprise (I Co) for installation of petroleum platforms, submarine pipelines and pipeline coating at various sites. While activities relating to survey, installation and commissioning were carried out in India, the platforms were designed, engineered and fabricated overseas. Based on facts, the Delhi HC held that, the project office (PO)

of the Taxpayer in India was a mere communication link and had no role to play in the execution of the contract. Therefore, the activities of the PO were preparatory and auxiliary in nature. The HC also ruled on various aspects of the Construction permanent establishment (PE) clause of the DTAA such as the start date for Installation PE, activities to be considered in determining duration threshold etc. The survey work carried out by an independent sub-contractor could not be included for determining the PE threshold as the taxpayer was not involved in it. Accordingly, the taxpayer was held not to have a fixed place PE in India according to the provisions of the India-UAE DTAA.

Mumbai Tribunal rules US-television company’s Indian distributor creates Dependent Agent PE

In the case of NGC Network Asia LLC [TS-714-ITAT-2015(Mum)], the taxpayer, a US company, was engaged in the business of broadcasting its two channels in various countries including India. The taxpayer appointed an Indian company (I Co) as its distributor to distribute its television channels and also to procure advertisements for telecasting in the channels. The Tribunal held that “advertisement airtime” is not capable of being used or consumed by I Co independently without the taxpayer agreeing to telecast the same on its channel, and hence, it lacks qualities to be characterized as “goods”. Therefore, the arrangement between the taxpayer and I Co is that of a Principal and Agent and I Co is a dependent agent PE of the taxpayer in India.

13 Tax Digest

Some key issues where Special Leave Petition (SLP) accepted by the SC

Citation of High Court Particulars Ruling of HC

DIT v. A.P. Moller Maersk

([TS-247-HC-2015(BOM)]

Tax authority preferred an appeal against Bombay HC’s order holding amount received by taxpayer from its Indian agents toward reimbursement for using communication system not taxable in India.

• The taxpayer had three agents working for it who booked cargo and acted as clearing agents for the taxpayer.

• The taxpayer had procured and maintained a global telecommunication facility called Maersk Net, which is a vertically integrated communication system. The agents incurred pro-rata costs for using the said system and agents’ share of the cost was recovered from them.

• The tax authority contended that the payment received from the agents were in the nature of Fees for technical services (FTS) under the India Denmark DTAA.

• The Bombay HC, held that the payment did not amount to FTS, since the said system was an automated software-based communication system, which did not require taxpayer to render any technical services and the arrangement was merely a cost-sharing arrangement between the taxpayer and its agents to efficiently conduct its shipping business without any profit element embedded therein.

14 Tax Digest

Some key issues on which Special Leave Petition was dismissed by the SC

Citation of High Court Particulars Ruling of HC

Keyaram Hotels P. Ltd v. DCIT

[TS-741-SC-2015]

Taxpayer preferred an SLP against Madras HC’s order holding rental income derived from leasing of commercial property as house property income.

• The taxpayer offered its rental income from letting out of commercial property as business income.

• The HC observed that taxpayer had given its premises for rent and was not engaged in any business activity. The taxpayer did not provide any evidence to contradict the above facts.

• The HC referred to SC decision in East India Housing and Land Development Trust Ltd v. CIT [42 ITR 49] wherein it was held that the income derived by the company from shops and stalls is income received from property and the character of that income is not altered because it is received by a company formed within the object of developing and setting up markets

• Applying the SC decision, the HC ruled that income received from letting out of the property was assessable as “income from house property”.

CIT v. Motor Industries Ltd.

[TS-671-SC-2015]

Tax authority preferred an SLP against Karnataka HC’s judgment allowing expenses incurred on buy-back of shares

• The taxpayer incurred expenses in connection with buy back of equity shares from its shareholders, which included professional charges, press announcements and statutory fees.

• Tax authority rejected the taxpayer’s claim of deduction on the ground that the expenditure was in connection with restructuring of share capital and hence, was capital in nature.

• The HC ruled in favor of the taxpayer stating that the consequence of such buy-back of shares is that the capital base of the company gets reduced. It is not of an enduring effect to bring the expenditure incurred in this regard as capital expenditure.

• The HC further observed that where there is no flow of funds or increase in the capital employed, the expenditure incurred would be revenue expenditure.

CIT v. Karnataka Soaps And Detergents Ltd.

[TS-655-SC-2015]

Tax authority preferred an SLP against Karnataka HC’s ruling allowing deduction for deferred revenue expenditure while computing “book profits” under the provisions of Minimum Alternate Tax (MAT)

• In this case, the tax authority refused to reduce deferred revenue expenditure from the book profit in the MAT computation on the ground that in the books of accounts, such expenses were deferred and the tax authority does not have power to tinker with the books of accounts.

• The HC noted that provisions of MAT computation deal with the deemed income, i.e., it is not actual income of the taxpayer. The purpose behind it was to prevent the taxpayer from adjusting its accounts or manipulating it to avoid payment of tax on the basis that they have not earned any profit at all.

• The HC concluded that once a taxpayer had incurred the expenditure and had arrived at the profits, merely because profit and loss accounts for shareholders show the expenditure as deferred, the taxpayer could not be denied the benefit of deferred revenue expenditure.

15 Tax Digest

Case law Payment description Ruling

PCIT v. M Tech India Pvt. Ltd.

[TS-19-HC-2016(Del)]

Delhi HC

Payment for purchase of software

• ► The taxpayer was a value-added reseller (VAR) and had entered into VAR agreements with various foreign and Indian software companies pursuant to which the taxpayer purchased software from these companies and resold to various end-users in India.

• ► The tax authority treated the payments made to software companies as “royalty” and not as purchase of software.

• ► The HC remarked that “In the cases where taxpayer acquires the right to use software, the payment so made will amount to royalty. However, in cases where the payments are made for purchase of software as a product, the consideration paid cannot be considered to be for use or the right to use the software.”

• ► The HC concluded that what was transferred was not copyright or the right to use a copyright but a limited right to use the copyrighted material. This did not give rise to any royalty income.

CIT (TDS) v. Heramec Ltd.

[TS-750-HC-2015(TELandAP)]

Telangana and Andhra Pradesh HC

Payment for purchase of technical data

• ► The taxpayer purchased technical data from its parent, which had, in turn, purchased it from a foreign company. The taxpayer made the payment to its parent without withholding tax on it.

• ► The tax authority contended that sale of technical data by parent company amounted to provision of technical service. Therefore, the taxpayer was required to withhold tax.

• ► The HC noted that the tax authority could not show how procurement of such ready study data by the parent, from another foreign company, and supplying it to the taxpayer amounted to rendering of technical services by the parent.

• ► The HC, accordingly, held that no services were rendered by the parent to taxpayer to be construed as technical services. Hence, the taxpayer was not required to withhold taxes on such payments to its parent.

Shell Global Solutions International BV v. ITO

[TS-678-ITAT-2015(Ahd)]

Ahmedabad Tribunal

India-Netherlands DTAA

►Consideration received for providing deliverables in the form of goods and for rendering commercial services.

• The taxpayer, a Netherlands entity, rendered services to an Indian Co. (I Co) under a package. Under the package among other things, the taxpayer provided deliverables in the form of goods such as best practice manuals, guidelines, newsletters etc. In addition, the taxpayer also rendered certain commercial services such as undertaking site inspection, technical/organizational review of processes, providing recommendations etc.

• ► The tax authority contended that the commercial services were in the nature of FTS and required tax withholding.

• ► The Tribunal imported “make available” condition under India-US DTAA to the India-Netherlands DTAA by virtue of the Most Favourable Nation (MFN) clause in the India-Netherlands DTAA. The Tribunal, thereafter, relied on the Memorandum of Understanding to the India-US DTAA to interpret the term “make available”.

• ► Accordingly, the Tribunal held that the aforesaid deliverables were excluded from the scope of FTS, since services, being managerial or consultancy in nature, cannot be taxed as FTS unless it involves transmission of technology. The deliverables did not involve any transfer of technology.

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

16 Tax Digest

Case law Payment description Ruling

Cummins Ltd.

[TS-16-AAR-2016]

AAR

►Receipt toward procurement services

• ► The taxpayer, a UK company, was rendering supply management services to its group company in India (I Co) which included: a) finalization of prices from suppliers and ensuring market- competitive pricing, b) ensuring that the approved suppliers have the necessary manufacturing capacities and infrastructure to provide for the raw material requirements, performance review of the suppliers.

• ► For these supply management services, the taxpayer received a fee from I Co calculated at 5% of the base prices from suppliers.

• ► The AAR relied on its own ruling in the case of Measurement Technologies (AAR No. 966 OF 2010) where it had held that services in the nature of procurement services can never be classified as technical or consulting. Furthermore, they do not make available any technical knowledge, experience, know-how etc.

• ► The AAR, therefore, held that procurement services were not taxable as FTS in the given case as well.

Foster Wheeler France S.A. v. DDIT

[TS-62-ITAT-2016(CHNY)]

Chennai Tribunal

India-US DTAA

Payment for providing job specifications and reviewing taxpayer’s work

• ► The taxpayer was a French company engaged in the business of engineering and construction contract, engineering equipment etc. The taxpayer entered an agreement with an Indian company (I Co), for providing technical, engineering services at its premises. To review and monitor the work done by the taxpayer’s employees, the taxpayer entered into another agreement with its AE, incorporated in the US.

• ► The taxpayer contended that payment to its US AE could not be construed as fees for included services (FIS) under India-US DTAA since sharing of best practices in engineering services in the form of written procedure, forms, specifications and details did not mean that technical knowledge was made available to the taxpayer by its AE.

• ► The Tribunal noted that when the taxpayer absorbed the technical knowledge, expertise, quality management, etc. for the purpose of implementing the project, such knowledge is very much available with the taxpayer and it can be implemented in other projects with other clients. Therefore, the taxpayer was capable of observing the opinion/advice given by AE and implementing it in its future projects.

• ► Therefore, the Tribunal held that the “make available” condition is satisfied. Hence, the payment made to the AE by the taxpayer was taxable as FIS under the DTAA.

17 Tax Digest

From the Tax Gatherer’s Desk

CBDT announces changes to compulsory quoting of permanent account number (PAN) rules with effect from 1 January 2016

CBDT has prescribed transactions where taxpayers need to mandatorily quote their PAN (PAN reportable transactions). Basis recommendations of the Special Investigation Team and similar sentiment echoed by the Finance Minister while presenting the Budget for 2015–16, CBDT, vide Press Release dated 15 December 2015, announced that quoting of PAN will be made compulsory for all sales and purchases of goods and services where the payment exceeds INR200,000. Monetary limits for other PAN reportable transactions are also to be revised.

Accordingly, CBDT has notified new Rules and forms substituting existing ones. The new Rules for PAN reporting compliance are effective from 1 January 2016. As an overview, the new Rules provide a list of PAN reportable transactions along with monetary thresholds, list of specified persons responsible to ensure PAN reporting etc. In the absence of PAN, a declaration in Form 60 with complete details needs to be furnished. It also includes mode and manner of furnishing half-yearly statements containing particulars of declarations received in Form 60 by certain specified persons.

Furthermore, the new Rules have also modified Annual Information Return (AIR) furnishing requirements connected with PAN reportable transactions with effect from 1 April 2016, which primarily includes scope expansion of AIR, changes in monetary threshold, introduction of e-filing of AIR etc.

(Source: Notification No. 95 dated 30 December 2015)

(Refer, EY Alerts dated 8 January 2016)

CBDT reiterates non-applicability of MAT to foreign companies

On 23 December 2015, CBDT has issued another Instruction [Instruction No. 18], wherein it has reiterated its view that MAT will not apply to foreign companies (including Foreign Institutional Investors(FIIs)/Foreign Portfolio Investors(FPIs)), which do not have any place of business in India. The Instruction also acknowledges CBDT’s commitment to the Supreme Court in case of Castleton Investment Ltd. [TS-570-SC-2015] to abide by

the decision taken in the Press Release. The tax authority is instructed to address pending proceedings on applicability of MAT to foreign companies in accordance with the above view.

It may be recalled that an earlier Instruction No. 9 dated 2 September 2015 and Press release dated 24 September 2015 (Refer to December 2015 edition of this newsletter), had stated that MAT provisions do not apply to foreign companies in certain cases.

(Source : Instruction No. 18/2015 dated 23 December 2015)

CBDT amends rules relating to furnishing information in respect of payments to NRs

CBDT has issued a Notification No. 93/2015 amending Income Tax Rules, which prescribes the manner and forms for furnishing information electronically by a person responsible for making any payment (Remitter) to an NR (Recipient).

The ITL provisions relating to reporting of payment made to an NR was recently amended by the Finance Act, 2015 to extend the reporting requirement to all payments made to NRs irrespective of whether such payments are taxable in India or not. Pursuant to the above, the Rule is now amended to prescribe forms for furnishing information for various categories of payments under the amended provisions of the ITL. The scope of payments illustratively includes all payments in the nature of royalty, interest, dividends, capital gains etc. The New Rule comes into force from 1 April 2016.

(Source : Notification No. 93 dated 16 December 2015)

(Refer, EY Alert dated 18 December 2015)

18 Tax Digest

CBDT clarifies on non-applicability of concealment penalty on additions made under normal provisions for cases under MAT assessment

With respect to the pre-amended period (tax years prior to 2015–16), CBDT has accepted the ruling of Delhi HC in the case of Nalwa Sons [(2010) 23 CTR 209 (Delhi HC)] wherein it was held that concealment penalty is not leviable in a case where there is concealment under normal provisions of the ITL but total income is ultimately computed under MAT. SLP of the tax authorities in this regard was dismissed by the SC.

Accordingly, CBDT has issued a Circular clarifying that concealment penalty under the ITL is not leviable for tax years prior to 2015–16 in cases where there is concealment under normal provisions of the ITL but total income is computed under MAT provisions.

CBDT has also clarified that for any adjustment made to income computed under MAT, levy of concealment penalty will depend on the nature of adjustment.

(Source: CBDT Press Release dated 29 October 2015)

CBDT issues draft guidelines for determination of Place of Effective Management (POEM) for corporate residency

According to the amended rule applicable from tax year commencing on 1 April 2015, a foreign company is treated as a resident of India if its POEM, in a given year, is in India. Pursuant to this, the CBDT has, vide Press Release dated 23 December 2015, issued a draft of the guidelines (Guidelines) for determination of POEM of foreign companies in India.

The Guidelines emphasize that the test of POEM is one of “substance over form” and is to be determined with regard to the facts and circumstances of each case on an yearly basis. The Guidelines provide that the determination of POEM is primarily based on whether or not a company has “Active Business Outside India” . For such companies, the POEM is deemed to be outside India if majority of the Board of Directors’(BOD) meetings are held outside India, unless facts suggest that the BOD is not the de facto decision-making authority.

For other companies, the Guidelines prescribe a twin test — (a) Identifying persons who take key management and commercial decisions (b) Determining the place where these decisions are, in fact, made. The Guidelines also address determination of POEM where participation in decision-making is by use of telephone or videoconferencing.

(Refer, EY Alert dated 24 December 2015)

19 Tax Digest

Finance Bill 2016 presented

The Finance Bill, 2016 was presented by the Finance Minister on 29 February 2016.

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

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

Budget Booklet

International tax provisions

Provisions related to individual tax payers

Transfer pricing proposals

Proposals relevant to Start-ups

Logistics Sector

Retail & Consumer Products Sectors

Infrastructure Sector

Life Sciences Sector

Real Estate Sector

Auto Sector

Financial Services Sector

Media & Entertainment Sector

Oil & Gas Sector

Technology Sector

Telecom Sectors

20 Tax Digest

Treaty Updates

The 2015 DTAA between India and Thailand came into force

On 13 October 2015, the 2015 India-Thailand DTAA came into force. The 2015 DTAA is effective in India from 1 April 2016 and replaces the earlier 1985 India-Thailand DTAA. The 2015 DTAA provides for a maximum withholding rate of 10% for dividends, interests and royalties. It also includes a Limitation of Benefits (LOB) clause allowing for domestic anti-avoidance and anti-evasion rules to override treaty benefits.

(Source: IBFD)

Memorandum of understanding (MoU) to 1985 India-Korea DTAA

India and Korea (Rep.) have signed an MoU on 9 December 2015 on suspension of collection of taxes during pendency of Mutual Agreement Procedure (MAP) under the 1985 India-Korea DTAA.

(Source: IBFD)

2015 Protocol to 1989 India Japan DTAA

On 11 December 2015, a protocol to amend the 1989 India-Japan DTAA was signed. The 2015 Protocol amends the Exchange of Information (EOI) article to provide for internationally accepted standards for effective exchange of information on tax matters including bank information and information without domestic tax interest. The Protocol also has a provision on assistance in collection of taxes as well as for exemption of interest income from taxation in the source country, on debt-claims guaranteed, insured by the Government or Government-owned financial institutions.

(Source: IBFD & MoF Press Release dated 2 December 2015)

Please click here to access the protocol

2015 Protocol to amend 1997 India-Belarus DTAA came into force

A protocol amending the 1997 India-Belarus DTAA came into force on 19 November 2015. The 2015 Protocol amends the EOI article to provide for internationally accepted standards for effective exchange of information on tax matters including bank information and information without domestic tax interest.

(Source : IBFD & Notification No. No. 2/2016 dated the 13th January, 2016)

21 Tax Digest

Happenings across the border

Turkey imposes obligation on certain taxpayers to provide info on e-commerce and other business activities

On 24 December 2015, the Turkish Government published, the Tax Procedure Law (TPL) General Communiqué series no. 464 requiring certain taxpayers to provide continuous information regarding electronic commerce (e-Commerce) and other business activities. This includes the parties, which are required to provide information and the type of information to be reported, reporting format, filing due dates, penalties etc.

Please click here to access the global alert

Thirty-one countries sign tax cooperation agreement enabling automatic sharing of country-by-country reporting information

On 27 January 2016, 31 countries signed the Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of country-by-country (CbC) reports, pursuant to the Organisation for Economic Co-operation and Development (OECD) Convention on Mutual Administrative Assistance in Tax Matters. The MCAA requires each jurisdiction’s competent authority to provide a notification regarding the jurisdiction’s readiness and intentions with respect to CbC reporting, including that the jurisdiction has in place legislation to require CbC reporting for fiscal years beginning on or after the date of the notification. The MCAA provides for CbC reports to be exchanged as soon as possible and no later than 18 months after the end of the fiscal year covered by a report. Additional countries may sign the MCAA in the future.

Please click here to access the global alert

European Commission releases anti-tax avoidance package designed to provide uniform implementation of BEPS measures and minimum standards across Member States

On 28 January 2016, the European Commission released an anti-tax avoidance package comprising four separate documents — (i) a proposed European Union (EU) Anti-Tax Avoidance Directive (the ATA Directive); (ii) a proposed

Directive implementing the automatic exchange of CbC reports (CbCR Directive); (iii) a communication proposing a framework for a new EU external strategy for effective taxation (the external strategy communication); and (iv) a recommendation on the implementation of measures against tax treaty abuse.

This package represents a significant set of developments, which whether adopted in all or part of its current form will have significant impact on businesses operating in both the EU and third countries.

Please click here to access the global alert

Saudi Arabian Government clarifies Service PE concept

In response to a formal request from an international government organization, the Government of Saudi Arabia (KSA), via a ministerial authority, has clarified when an NR service provider is considered to have established a service PE in the KSA. The KSA official clarification interprets the service PE provision [article 5(3)(b) of the United Nations Model Convention 2011 (UN MC)] to mean that a PE arises if the period of provision of services to a customer in the KSA lasts for 183 days or more in a calendar year or a 12-month period. Furthermore, it provides that the activity and the profits from the contract then become taxable in the KSA, and subject to all related tax filing requirements.

The letter indicates that the tax authority believe that the text of the service PE provision under UN MC does not require any physical presence as a criterion for establishing a PE in the KSA with respect to the provision of cross-border services. Moreover, as the standard to be applied, it is the duration (continuation) of the provision of services “inside the KSA,” that should be the triggering factor for a PE of an NR service provider.

Please click here to access the global alert

22 Tax Digest

Case Laws

Indirect TaxCustoms

Supreme Court

When main order is not challenged and only the review order is challenged, SC held that it is not obliged to allow SLP

Customs Act, 1962; in favor of Revenue

The assessee filed an application for refund of excess provisional Customs duty under Section 18(2) of the Customs Act, 1962 (Act). Revenue rejected the application on the ground that the application was not filed under appropriate Section 27(2) of the Act and thus, related compliances remained unfulfilled. Aggrieved, the assessee had filed a writ petition before the Bombay High Court (HC) challenging the decision of the original authority in relation to applicability of appropriate section. However, the HC observed that they had passed the incidence of duty to the customers and have recovered the amount due to them. The assessee thereafter, filed an appeal before the Supreme Court (SC) against the decision of the HC under the provisions of Article 136 of the Constitution. Revenue contended that according to Section 2(2) of the Act, the term “assessment” includes provisional assessment; hence, application for refund was required to be filed only under Section 27(2) of the Act. They also contended that SC is not required to entertain the appeal if only the review order and not the original order has been challenged. The assessee submitted that the power given under the Article 136 of the Constitution cannot be curtailed by judicial decisions. Article 136 of the Constitution does not confer any right of appeal on any party but confers a discretionary power on the SC to interfere in suitable cases.

Accepting Revenue’s contention, SC held that when main order is not challenged and only the review order is challenged, the court is not obliged to allow SLP. If the basic judgment is not assailed and the challenge is only to the order passed in review, SC is obliged not to entertain such special leave petition. The said principle has gained the authoritative status and has been treated as a precedential principle for more than two decades. Consistency is the cornerstone of the administration of justice. It is consistency, which creates confidence in the system and this consistency can never be achieved without respect to the rule of finality. It is with a view to achieve consistency in judicial pronouncements, the Courts have

evolved the rule of precedents, principle of stare decisis etc. These rules and principle are based on public policy. The SC further commented that even if the order passed in review is set aside, the order that is not challenged cannot be set aside. If the order passed in review recalls the main order and a different order is passed, definitely the main order does not exist.

Bussa Overseas and Properties (P) Ltd. and Anr v. Union of India and Anr [2016-TIOL-08-SC-CUS]

High Court, Larger Bench – Bombay

Simultaneous penalties on partners and firm held to be unsustainable

Customs Act, 1962; in favor of Revenue

Show cause notices (SCN) were issued to assessees regarding why the goods imported should not be confiscated and penalty should not be imposed on the importing firms and their partners, thereof. The assessee placed reliance on the Bombay HC’s decision in the case of Commissioner of Customs (EP) v. Jupiter Exports [2007-TIOL-329-HC-CUS], which held that the partnership firm and partner cannot be separated from each other. Whereas, Revenue relied upon the decision of the Division Bench HC in the case of Textoplast Industries v. Additional Commissioner of Customs [2011-TIOL-438-HC-MUM-CUS], which specified that the partners are independent of the partnership firm. In view of contrary decisions of the Bombay HC, regarding whether to consider partners and firms independent of each other for the purpose of imposing penalty under Section 112(a) of the Customs Act, 1962 (Act), wherein the matter was referred to the Larger Bench of the Bombay HC. Larger Bench of Bombay HC has held that simultaneous penalty on partner and the partnership firm registered under the Indian Partnership Act, 1932 can be imposed in terms of Section 112(a) of the Act under certain circumstances. The HC, in this regard, noted that penalty under the said Section is not restricted to importer but includes in its scope any person who does or omits to do any act, which renders goods liable to confiscation. In view of the above, the HC referred to the provision of Section 140 of the Act, which provided that for the proceedings and imposing penalty against the entity and officers of the entity, the term “company” as specified in clause (a) of the Explanation to Section 140 includes partnership firm. It was, however, held that if the Revenue seeks to impose simultaneous penalty on partner,

23 Tax Digest

the notice must make out a case of knowledge on the part of the partner in his individual capacity to make it a case of abetment. The Larger Bench further held that where the allegation on the firm is of abetment and/or mens rea, then Section 135(1)(a) read with Section 140 is applicable and, hence, simultaneous penalty is imposable.

Amritlakshmi Machines Works & Another v. Commissioner of Customs (Import) [2016-TIOL-186-HC-MUM-CUS-LB]

High Court, Bombay

Quashing DGFT clarification, HC held that no cap on Incremental Export Incentivisation Scheme (IEIS) scrip value and subject to scrutiny

Customs Act, 1962; in favor of assessees

Government of India (GoI) had introduced an IEIS vide Notification 27 (RE-12)/2009-2014 (2012 Notification) in December 2012 whereby an incentive was provided to the exporters by way of granting duty credit scrip at 2% of the incremental growth achieved by the exporter subject to fulfilment of certain conditions and criteria as specified therein. Thereafter, the GoI came up with another Notification (2013 Notification) in September 2013 whereby, ceiling to the duty credit scrip was introduced in terms of percentage of growth. It also provided that the claims in excess of the value would be subjected to increased scrutiny by Regional Authority. A Clarification introduced in September 2014 restricted the amount of duty scrip to INR2 million. The assessees contended that there was no monetary limit specified in the 2012 Notification and in the 2013 Notification subject to increased scrutiny by Regional Authority. Whereas, the Clarification issued restricted the benefit to the amount specified above. It was stressed that the Clarification cannot go beyond the limits of the notifications itself. The HC accepted the contentions of the assessees, set aside the Clarification and held that no cap on IEIS scrip value.

JSW Steel Ltd. & Ors. v. Union of India & Ors. [2016-TIOL-157-HC-MUM-CUS]

High Court, Delhi

HC quashes circulars denying cash refund of 4% SAD paid through DEPB scrips

Customs Act, 1962; in favor of assessee

Pursuant to Notification No. 102/2007 – Customs, dated 14 September 2007 (Notification), the assessee had filed applications for refund of Special Additional Duty (SAD). The assessee had paid SAD while importing the goods by utilizing Duty Entitlement Pass Book (DEPB) scrip and also by payment of cash. The assessee’s four refund applications had been rejected on the basis of the aforesaid Circulars.

Being aggrieved, writ petition was filed before the Delhi HC by the assessee challenging CBEC Circular Nos’. 6/2008-Cus, 10/2012-Cus and 18/2013-Cus, which disallowed refunds of SAD in cash under Notification, if same was paid using DEPB scrips. The assessee contended that the Circulars could not have amended the Notification No. 102/2007-Cus, which exempts SAD if goods imported were meant for subsequent sale, and that they were ultra vires the Customs Act. Revenue contended that Section 151A of the Customs Act, 1962 (Act) w.r.t. the power of Central Board of Excise & Customs (CBEC) to issue a Circular bringing out a change in the procedure to avail exemption granted under the said Notification. They further contended that from time to time Circulars have been issued extending the time limit within which such refund could be claimed; the two Circulars were issued to remove the ambiguities and to streamline the procedures.

The HC noted that upon representation by importers, Customs officials had sought clarification from CBEC on whether refund could be granted where the initial payment of SAD had been made by utilizing DEPB scrips. As a result, CBEC issued Circular No. 6/2008-Cus clarifying that refund of SAD, which was liable to be made upon fulfilment of conditions of Notification, will not be in cash but re-credited to the relevant DEPB scrips, which were used for making payment of SAD. There was no corresponding amendment made to the Notification itself. However, even this proposed system of re-crediting DEPB scrip was unable to be given effect to, since Director General of Foreign Trade (DGFT) had no mechanism for re-crediting them through the electronic data interchange (EDI) system. This led to a further Circular No. 27/2010-Cus being issued, where considering the difficulties in allowing re-crediting of scrips and the view of DGFT that such re-crediting through EDI was not feasible and considering the large scale pendency of refund claims, it was

24 Tax Digest

decided that registration of re-credited duty scrips “on the basis of consolidated certificate furnished by Customs should be allowed on manual basis”. The Circular stated the importers were to be advised to make initial payment of 4% SAD in cash. Subsequently, Circular No. 10/2012-Cus was issued stating that no re-crediting of DEPB scrips would be done if the payment of Countervailing Duty (CVD) was done by using the DEPB scrip. Therefore, it was mandated that, in future, exporters should pay SAD component in cash if they wanted a refund. This was reiterated by a subsequent Circular No. 18/2013-Cus issued on 29 April 2013. It extended the time limit for using the re-credited DEPB scrips in case of 4% SAD up to 30 September 2013.

With respect to Section 151A of the Act, the HC noted that same is for a very limited purpose of issuing of instructions to Customs officers for the purpose of “uniformity in the classification of goods or with respect to the levy of duty thereon” or for the implementation of any other provisions of Customs Act or of any other law for the time being in force, in so far as they relate to “any prohibition/restriction for import or export of goods”. According to HC, the said Section does not envisage any amendment being made to an exemption Notification that may have been issued in exercise of powers in terms of Section 25(1) of the Act. Such amendment could be made only by exercising the powers under Section 25(1). The HC observed that, although the said Circulars were projected to have been issued for streamlining the procedure and to remove ambiguities, in fact, what they sought to amend was Notification No. 102/2007-Cus itself by introducing an additional condition for being entitled to refund, which condition did not find a place in the Notification. In this regard, the HC noted that the question whether the device of Circulars could be adopted for modifying a Notification had been decided in the cases of Sandur Micro Circuits Ltd. v. Commissioner of Central Excise [2008 (8) TMI 3 SC], Modi Rubber Ltd. v. Union of India [1978 (2) ELT (J127)(Del)] and Pioneer India Electronics (P) Ltd. v. Union of India [2014 (301) ELT 59 (Del)]. Therefore, in view of the above, the legal position was clear that Circular Nos. 6/2008-Cus, 10/2012-Cus and 18/2013-Cus could not have imposed additional restriction on availing exemption in terms of Notification issued u/s 25(1) of Act.

The HC observed that an amendment to a notification issued in exercise of the powers under Section 25(1) of

the Act has to be brought about only by issuing another notification under that provision. Hence, in as much as the Circulars sought to impose additional restriction, they were held to be ultra vires of the Act and could not be legally sustained. Consequently, they were held invalid in so far as they sought to deny importers and exporters the refund of SAD paid by using DEPB scrips. Accordingly, rejection of assessee’s refunds was held to be bad in law and accordingly, the orders were set aside. Since the assessee had fulfilled the conditions set out in the Notification for availing refund, Revenue was directed to issue orders granting refund within stipulated period, along with applicable interest. Accordingly, HC allowed assessee’s writ petition.

Allen Diesels India Pvt. Ltd. v. UOI & Others [TS-28-HC-2016 (Del)-Cust]

High Court, Delhi

SCN upheld on the ground that date of knowledge of mis-declaration not relevant, instead, date of clearance of goods under a BoE, which contained such mis-declaration and/or undervaluation held to be relevant date

Customs Act, 1962; in favor of Revenue

Revenue received information that assessee had imported low/high carbon steel wire rods and electrolytes zinc (goods) free of duty under the Duty Exemption Entitlement Certificate (DEEC) Scheme. They alleged that assessee had mis-declared and undervalued the goods for seven consignments under various bills of entries (BoEs). They further disposed it in the local market for profit instead of using them in the manufacture of steel wire ropes for export. During the Directorate of Revenue Intelligence (DRI) investigations, an SCN was issued to the assessee in relation to the above matter for two BoEs covering three consignments only. The assessee was directed to pay tax with penalty and interest. They received another SCN relating to the same matter for different BoEs, which covered the remaining four consignments. Being aggrieved, assessee filed writ petitions before the Delhi HC contending that the second notice cannot be issued on the same matter and that it should be quashed based on the principle of res judicata and, as it is barred by limitation. They contended that period of limitation should be computed from the date of knowledge of allegation of

25 Tax Digest

undervaluation. However, the HC rejected the assessee’s arguments observing their contentions had no merit. Accepting Revenue’s contention, the HC upheld the SCN observing that the relevant date for the purpose of limitation would be the date of clearance of the BoEs.

Maldhari Sales Corporation and Ors., Subhash Gupta, Janki Ram v. Union of India and Ors. [2016-TIOL-187-HC-DEL-CUS]

High Court, Gujarat

Refund of Customs duty paid by SEZ units is governed by Section 27 of Customs Act, thus refund claims by SEZ units would lie before Customs Authorities and not before SEZ authorities in terms of the SEZ Act or Rules

Customs Tariff Act, 1975, Special Economic Zones Act, 2005; in favor of assessee

The assessee operates a unit in the Dahej Special Economic Zone (SEZ) and manufactures stone wool insulation products. According to the assessee, Revenue collected a sum by way of CVD, though it was not payable by them. The assessee, therefore, filed a refund claim before the concerned Customs authority, which has a jurisdiction over the SEZ unit. However, the refund claim was returned by the Assistant Commissioner, Customs, Surat vide a communication, on the ground that he has no authority to process the same and cited that the case of Anita Exports v. Union of India [2014-TIOL-2162-HC-AHM-CUS] is distinguishable on facts. Being aggrieved, the assesse, challenging the communication before the Gujarat HC, raised the issue regarding who would be the correct authority to process refund claims with respect to units situated in SEZs.

The HC held that the issue regarding who will be the correct authority to process refund claims with respect to units situated in SEZs has been brewing up, since quite some time. Revenue authorities are unable to decide such applications on account of certain intradepartmental communications. The situation had come to a stage where for a prolonged period, neither Customs authorities nor the SEZ authorities would entertain such refund applications. A bunch of petitions came up before the Gujarat HC, wherein group of matters came to be decided

in Anita Exports (supra) case in which it was held that it is declared that unless proper mechanism is framed under the SEZ laws and statutory provisions are enacted/amended, the Commissionerate of Customs will continue to hold the authority under Section 27 of the Customs Act, 1962 to entertain refund claims of excess payment of Customs duty, redemption fine or penalties as the case may be, adjudicated and collected by the Customs authority under the Customs Act, 1962, even with respect to units situated in SEZ areas. Despite such legal position clarified by the HC, the Assistant Commissioner of Customs, Surat once again refused to entertain the refund application of the assessee on the ground that the judgement in Anita Exports (supra) ruling is not applicable to the facts. The HC held that for multiple reasons, the approach of the Assistant Commissioner was incorrect. Firstly, in Anita Exports (supra), there were a bunch of petitions, which did not have identical facts. It was only for convenience that they had referred to detailed facts in case of Anita Exports (supra). Furthermore, the HC did not see any material difference so far as the facts of Anita Exports (supra) and the instant case. The ratio of the decision was that for any Customs duty collected, refund application needs to be maintained under Section 27 of the Customs Act before the specified authority of the Customs. It was further held that without amending said statutory provisions, it was not possible for the Government of India to prevent the competent Customs authority from entertaining and deciding such refund application. The distinction, even if exists, has no relevance. As long as the duty in the nature of Customs duty has been collected, the refund will be payable only in terms of Section 27 of the Customs Act. Since the statute also prescribes the authority competent to entertain such an application, refund applications needs to be maintained before such authority. Unless there is an amendment in law, Revenue authorities cannot prevent the competent officer from exercising its statutory powers, in fact, duties. Accordingly, the HC quashed the communication by the Assistant Commissioner and directed the competent office of the Customs Commissionerate, Surat to decide the application.

Roxul Rockwool Insulation India Pvt. Ltd. v. Union of India & Others; 2016-TIOL-319-HC-AHM-CUS

26 Tax Digest

Excise duty

Supreme Court

Onus is on Revenue to prove that notional interest on advances received had an effect of reducing the sales price

Central Excise Act, 1944; matter remanded

Assessee was engaged in printing glass bottles. It had received 90% to 100% advances from its customers for their purchases, and accordingly, assessee was giving 3%–4% discount to such customers. The adjudicating authority passed an order by adding notional interest accrued on such advances to the sales price and accordingly calculated duty. Aggrieved by this, the assessee filed an appeal before the Tribunal. Third member of the Tribunal opined that the Revenue had not been able to discharge the onus by adducing cogent material evidence that the advances obtained from the buyer had really been instrumental in reduction of the price. Aggrieved by this, Revenue filed an appeal before the SC.

The SC held that there should be a connect and link between the two, i.e., the money advanced and such advance was a consideration, which could form the basis for depression of sale price. Evidence and material to establish the said factual matrix has to be uncovered and brought on record to connect and link the sale price paid on paper and the “other” consideration, not gratis, but by way of interest-free advances. The onus will be on the revenue to prove that the effect of advances received from the buyer had the effect of reducing the sale price. Accordingly, the matter was remitted to the Tribunal for fresh disposal and without expressing any opinion on any of the aspects.

CCE, Pune v. Hindustan National Glass and Industries Ltd [2016-TIOL-07-SC-CX]

High Court, Allahabad

Period of limitation not applicable in case of refunds claimed for duty paid under protest

Central Excise Act, 1944; in favor of assessee

The appellant is engaged in the processing of grey fabrics with the aid of hot air stenter. The Commissioner had determined the annual capacity of production and monthly duty liability of the assessee on provisional basis w.e.f. 28 February 1998. The assessee, without filing an appeal, deposited the duty. Subsequently, the appellant lodged a protest refund vide letter dated 13 June 1999 and requested the Revenue to re-determine the annual capacity and the correct amount of duty. It further contented that, henceforth, the duty would be paid under protest. The contention of the assessee was found to be correct and accordingly, the Revenue refunded the excess duty paid from 14 June 1999 onward. However, they refused to refund excess amount deposited prior to 14 June 1999 on the ground that the refund application was filed after the period of limitation. According to Section 11B of Central Excise Act, period of limitation is six months from the date of payment unless the duty paid is under protest. Admittedly, in the present case, refund application was filed after six months. Based on above, the issue for consideration in the present case was whether the assessee has deposited the duty under protest.

The HC opined that the sum and substance of the letter of protest has to be read as a whole and not in parts. The letter of protest (filed on13 June 1999) covers the period prior to 14 June 1999 also. Once the department accepts the contention of the assessee and grants refund, for the period subsequent to the letter of protest, there was no reason to refuse the refund for the prior period. Accordingly, the HC held the case in favor of the assessee, entitling him refund for the period prior to 14 June 1999.

V.N.Dyers v. CCE, Allahabad [2016-TIOL-352-HC-ALL-CX]

27 Tax Digest

Authority for Advance Rulings (AAR)

Proposed activity of repair and maintenance of equipment undertaken by passive telecom infrastructure provider does not amount to manufacture; CENVAT Credit of Excise duty paid on parts and spares of capital goods and Service tax paid on inspection, certification and engineering services admissible to such passive telecom service provider

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

The applicant is engaged in providing telecommunication infrastructure support to mobile telecom operators in India. It proposes to undertake repair and maintenance of equipment used at telecom sites across India. While undertaking repairs and maintenance of equipment, the applicant might procure new parts and spare from vendors and avail certain input services such as inspection, certification and engineering services. Accordingly, the key issues raised before AAR were as follows:

• Whether the activity of repairs and maintenance proposed to be undertaken by the applicant will amount to manufacture within the meaning of Section 2 (f) of the Central Excise Act, 1944?

• Whether the applicant is eligible to avail CENVAT credit of duty paid parts and spares and Service tax paid on input services provided by third party vendors and used by applicant for providing output services?

AAR opined that the activity of repairs and maintenance of equipment does not amount to manufacture, since there is no change in the identity of the equipment and it retains its original identity. On the other issue, it observed that in the case of spares and parts, Rule 3(1) of the CENVAT Credit Rules, 2004 allows for credit of Excise duty paid on capital goods used in the provision of output service and that the definition of capital goods includes components, spares and accessories of the same [Rule 2(a)(A)(iii)]. Accordingly, AAR held that applicant is eligible to avail CENVAT credit

of Excise duty or Countervailing duty paid on parts and spares and Service tax paid on inspection, certification and engineering services, etc. for the repair and maintenance activities and claim set off against the output Service tax paid for rendering of passive infrastructure service by the applicant to its customers.

AAR Ruling in the case of Indus Towers Ltd.; Ruling No. AAR/CE/03/2016 [2016-TIOL-02-ARA-CX]

Activities such as inspection, testing and installing batteries, activities relating to spectacles and frames, freebies, tagging etc. do not amount to manufacture or deemed manufacture

Central Excise Act, 1944; in favor of applicant

Applicant is engaged in providing IT enabled/online platform to third party manufacturers/merchants to list and market their products. This platform is offered for a fee to merchants for such online listing services. The applicant now proposes to offer additional activities to its clients (i.e., merchants) such as inspection, cleaning, touching-up and re-stitching etc., on goods received by the applicant from the merchants in the warehouse(s) or on shipment of goods to the merchant’s customer or on customer returns for which the applicant may charge a separate consideration/fees. Such consideration/fees would be subject to Service tax.

Applicant submits that the activities proposed to be performed by the applicant will not alter the primary packing or original labeling. Furthermore, all the proposed activities will not involve affixation, alteration or change in the maximum retail price/retail sales price (MRP/RSP) of any product/item received in the warehouse. No value addition is undertaken vis-à-vis the products itself.

The issue before the AAR was whether additional activities proposed to be undertaken by the applicant will be regarded as manufacture or deemed manufacture under Section 2(f) of the Central Excise Act, 1944. Revenue was in agreement with the applicant that all the activities do not amount to manufacture except activities relating to spectacles and frames, freebies and tagging of jewelry.

AAR held that assembly of parts of the frames does not create something new, and hence, it cannot be termed as manufacture. Therefore, it held that the activity relating to spectacles and frames (placing in case, tightening screws on eyewear) will not amount to manufacture under Section 2(f).

28 Tax Digest

With respect to freebies, it observed that the applicant in their application had made it clear that all the proposed activities would not involve affixation, alteration or change in MRP/RSP of any product/item received in the warehouse. Furthermore, all items, where required, will already have an MRP/RSP affixed or pre-printed. In view of this, AAR held that putting of free items with other products, in this case, will not amount to manufacture under Section 2(f).

AAR observed that according to CBEC clarification dated 2 March 2012, if brand name is not affixed or embossed on the jewelry but appears on the packing, such as jewelry box or pouch or warranty card or certificate of quality, such goods will not be treated as branded jewelry and therefore, will not be liable to excise duty. In the instant case, the applicant has submitted that the tag is applied by them while placing the jewelry in the box to prevent return of counterfeit items. Application does not mention that applicant will affix or emboss brand name on the jewelry. Tagging in this case is not embossing or affixing. Therefore, the activity of tagging of jewelry will not amount to manufacture under Section 2(f).

In view of the above, it held that all the proposed activities such as inspection, testing and installing batteries, cleaning, lint brushing and deodorizing, touching up and re-stitching, filing, debundling and jewellery correction, activities related to spectacles and frames, folding, hanging and ironing, polishing, shinning and coating, tagging, freebies, protective stickering, placing the products in original box, inserting warranty card, inserting moisture absorbing tablets, inserting books mark, replacing shoe laces to be undertaken by the applicant will not amount to manufacture or deemed manufacture under Section 2(f) of the Central Excise Act, 1944.

AAR Ruling in the case of Amazon Seller Services Private Limited, Bangalore; Ruling No. AAR/CE/06/2016 [2016-TIOL-06-ARA-CX]

CESTAT, Mumbai

Installation and commissioning charges for installation of goods at customer’s premises not includable in assessable value.

Central Excise Act, 1944; in favor of assessee

The assessee had cleared vacuum impregnation plant, industrial washing machine on payment of duty on its transaction value. The assessee subsequently undertook erection and commission activity of the said machine at the premises of the customer and charged separately for such work. The assessee did not include expenses on erection and commissioning in the assessable value as they were post clearance expenses incurred on the behest of customers. Revenue argued that the assessee is required to include their charges in the assessable value for discharging excise duty.

Tribunal relied on the decision of Thermax Ltd. v. Collector of Central Excise [2002-TIOL-205-SC-CX] and held that erection and commissioning expenses for installation of vacuum impregnation plant at customer’s premises cannot be included in assessable value.

Ultraseal India Pvt. Ltd. v. CCE, Pune [2016-TIOL-352-CESTAT- MUM]

Service tax

Authority for Advance Rulings

Salary and allowance paid by Indian subsidiary to a deputed employee who is on the rolls of the foreign holding entity will not attract Service tax

Finance Act, 1994; in favor of applicant

A tripartite was entered into by agreement between the applicant (Indian subsidiary), foreign entity (holding company) and an employee who was on the permanent roll of the Foreign Entity. Under this agreement, the services of the employee were to be utilized by the applicant for a particular term. As long as the employee served in India, all his salaries were to be paid by the applicant. Furthermore, his social security interests were to be taken care of by the foreign entity. In the past these services were subject to Service tax as manpower services. However, after 2012 with the advent of the Negative List,

29 Tax Digest

a fresh definition of service was introduced under section 65(44) of the Finance Act, 1994. Based on the above, the question of applicability of Service tax on salary and allowances paid to the employee was put forth before the AAR.

The applicant relied on the definition of service and more particularly on the exclusion provision, which suggests that a provision of service by an employee to the employer in the course of or in relation to his employment will not be included in the definition of service. It was contended that the employee was providing service in his capacity as an employee, which was clear from the wordings of the agreement.

This contention of the applicant was held to be correct by the AAR. The agreement was very clear to suggest that so long as the employee served in India, he would be treated to be the employee of the applicant though his interests as an employee of the foreign entity in so far as his social security interests are concerned, will be taken care of by the foreign entity. It was trite that the employee does not get salary from the foreign entity when he is offering services to the applicant and on that behalf, the benefits are mutually exclusive so far as they are concerned with salary. The only obligation on the foreign entity is regarding the social securities, which are not reimbursed by the applicant.

Therefore, it was held that there will be no liability to pay Service tax on the salary and allowances payable by the applicant to the employee in terms of his dual employment agreement.

North American Coal Corporation India Pvt. Ltd. v. Commissioner of Central Excise, Pune-III [2015-VIL-05-ARA]

Provision of car lease to employees in the course of employment will not amount to service and thus will not be subject to Service tax

Finance Act, 1994; in favor of applicant

The applicant was to provide vehicles to its employees during the period of employment. The applicant was to hire the cars from car leasing companies and under the scheme those cars would be made available to such employees who are firstly continuing to be the employees of the applicant and secondly who accept the option to

have the car for their personal as well as official use. In lieu of this, the company was to charge the said employees the same amount which the applicant will be paying to the car leasing company from whom they hire the car. The question posed by the AAR was as to whether the amount, which the applicant charges to its employees for the use of vehicles will be subject to Service tax.

The applicant contended that the said transaction will be covered by the exception to the definition of “service”. According to the exception, a provision of service by an employee to the employer in the course of or in relation to his employment will not be included in the definition of service. Furthermore, the amount to be recovered from the employee for the car lease is the same as what is paid to the car leasing company.

The revenue contended that the car will be made available to the employee for both official and personal use and that such task of making available for both uses should invite Service tax.

The AAR observed that firstly, the car will be provided in the course of employment as was clearly suggested by the agreement between applicant and its employee. Secondly, it will be provided to the employee only because he would be in service and in that sense becomes in relation to his employment. Since both the conditions were fulfilled, it will not amount to “service”. Furthermore, the AAR stated that whether the car is given for official use, personal use or both will not make any difference.

Therefore, it was held that such a provision of car lease will not amount to service and hence, will not be liable to Service tax.

J.P. Morgan Services v. Commissioner of Service Tax, Mumbai II [TS-713-AAR-2015]

New Delhi Tribunal

Supervision of erection and commissioning of plant, as a part of supply agreement, and provided free of cost will not constitute a service and accordingly will not be liable to Service tax

Finance Act, 1994; in favor of assessee

Demand was raised on the ground that no Service tax was paid on erection, commissioning or installation service and consulting engineer service provided by the assessee. However, the assessee contended that

30 Tax Digest

it received a purchase order for design, engineering, supply and supervision of erection and commissioning of limestone crushing plant. It is essentially an order for the supply of stone crushing plant. It did not provide erection, commissioning or installation service but only provided supervision of erection and commissioning. The assessee further contended that supervision of erection and commissioning, apart from being free of cost, was incidental to sale of the plant. The revenue, on the other hand, contended that commissioning was a part of the purchase order and therefore, it cannot be said that erection, commissioning or installation service has not been rendered.

The tribunal referred to the decision of the Andhra Pradesh HC in the case of CIT vs Sundwiger EMFG & Co [(2003) 129 Taxman 776 (AP)], wherein the Andhra Pradesh HC held that supervision of erection and commissioning has to be treated as part of sale and such supervision is only incidental to sale. Additionally, in the present case, supervision was provided free of cost. Moreover, a careful perusal of the purchase order made it clear that the transaction was essentially for supply of limestone crushing plant. Even if it is held that there is a service component in the form of supervision service, the same is rendered free of cost and thus no Service tax liability can arise.

Therefore, it was held that the impugned Service tax demand was not sustainable and therefore, set aside by the Tribunal.

Larsen & Toubro Ltd. v. CCE, Bhopal [TS-667-CESTAT-2015(DEL)]

Mumbai Tribunal

Package tours for air travel and hotel accommodation offered by an airline will not amount to tour operator services

Finance Act, 1994; in favor of assessee

The appellant was engaged in operating airlines and entered into a contract with hotels to offer package deals for air travel and hotel accommodation to customers who would book tickets. The passenger was given the facilities of transportation, stay and sight-seeing as a

package tour. The appellant discharged the hotel bills, etc. directly, though the hotel booking accommodation was not done by the appellant but through agents appointed for this purpose. Show cause notice was issued and order adjudicated, for demand of Service tax, interest and penalty, considering these services to be tour operator services as defined under section 65(105)(r).

The appellant contended that they were not conducting any tour operator service as they were not in the business of planning, scheduling, organizing or arranging tours as provided in the definition of “tour operator”. They offered a particular package and customers took the offer and decided when they would like to travel and accordingly booked the tickets. Furthermore, such packages were modeled only to increase revenue in the form of sale of flight tickets to customers.

The revenue on the other hand contended that the appellant through their office or through its agents helped the customers to plan and schedule their holiday to a specific destination and it will fall under the definition of tour operator service.

The Tribunal, on perusing the details of the package deals observed that they entail travel, accommodation and sight-seeing as applicable but do not indicate that the appellant would plan, schedule or organize the tours for passengers. The passengers organized their own travel dates. Furthermore, these packages were modeled with the intent of increasing revenue from ticket sales. Based on the above observations and with reference to the case of T.N. State Trans. Corpn. Kumbakonam Ltd. [2009 (14) STR 760 (Tri. Chennai)], the Tribunal held that the provision of said package tours will not amount to tour operator service. Therefore, the impugned was found unsustainable and accordingly set aside.

Jet Airways (India) Ltd. v. Commissioner of Service Tax, Mumbai I [TS-693-CESTAT-2015(Mum)]

Chennai Tribunal

Royalty received by the port for allowing company to undertake construction and operation of terminal on BOT basis will be leviable to Service tax under “Port Service”

Finance Act, 1994; in favor of revenue

31 Tax Digest

Assessee was a statutory body rendering port services against which they are receiving monthly royalty charges under Licence Agreement for allowing the bidder for construction and operation of the terminal on Build Operate and Transfer basis. Assessee contented that the royalty received was for the leasing of a vacant plot of land. Whereas revenue contented that the royalty charges received are taxable under “Port service” for the period June 2003 to January 2007. It argued that the definition of “Port service” is very wide and includes any activity, service rendered to any person and in any manner in relation to a vessel or goods.

Tribunal considered the agreement to be a licence agreement and not a lease agreement. It observed that the container terminal, which is the subject of the agreement is for the purposes of movement of vessels and goods and the royalty charges were received for overall consideration. BOT agreements cannot be equated with normal agreements of leasing property. Wherever services are provided directly or indirectly by a port, the charging provision will be attracted, regardless of its nomenclature. Therefore, it was held that the services would fall under “Port services”.

Tuticorin Port Trust v. CCE [2015-VIL-683-CESTAT-CHE-ST]

CENVAT

High Court, Gujarat

CENVAT credit cannot be denied due to procedural lapse of not applying for registration as input service distributor

CENVAT Credit Rules, 2004; in favor of assessee

The assessee was engaged in the manufacture of water treatment plant and other connected items. It had five manufacturing units and registered office at Ahmedabad. It was also providing taxable services such as erection and commissioning, repair and maintenance of water treatment plant etc. Show cause notice (SCN) was issued by the revenue authorities on the grounds that the assessee had not registered itself under the Service Tax (Registration of Special Category of Persons) Rules, 2005 and that tax credit from one unit was being utilized to discharge liability of another unit instead of pro-rata distribution among different units.

The Court observed that there was no requirement of

pro-rata distribution during the relevant period. This condition was added to Rule 7(d) subsequently. Hence, in the absence of any specific restriction, the contention of the revenue was set aside. On the issue of non-registration, it was noted that there was nothing in either the Service Tax (Registration of Special Category of Persons) Rules, 2005 or the CCR, which would disentitle an input service distributor from availing CENVAT credit, until and unless such registration was applied for and granted. Furthermore, it was found that full records were maintained and the irregularity, if any, was procedural. Therefore, the Court ruled in favor of the assessee and dismissed the appeal by the revenue, by allowing the credit availment.

Commissioner of Central Excise v. Dashion Ltd. [TS-9-HC-2016(GUJ)-EXC]

Tribunal, Ahmedabad

CENVAT credit admissible in respect of commission paid to overseas agents

CENVAT Credit Rules, 2004; in favor of assessee

The assessee entered into “International Market Service Agreements” with various companies overseas for rendering sales promotion service. During the course of audit, it was noticed that the appellant had availed credit of Service tax paid on commission to overseas agents for rendering the services during November 2005 to March 2008. Revenue contended that the services were received and utilized by the assessee for selling of the goods and not in relation to the manufacture of the goods and clearance of the final product from the place of removal, and hence, it cannot be considered as “input service” as defined under Rule 2(l) of the CCR, 2004. It relied on the decision of the Gujarat HC in the case of Cadila Healthcare Ltd. [2013-TIOL-12-HC-AHM-ST] in support of its contentions.

Tribunal held that on harmonious reading of the CBEC Circular no. 943/04/2011-CX dated 29 April 2011 and Notification no. 2/2016-ST dated 3 February 2016, it is clear that the agent’s remuneration linked with sale of goods will cover sales promotion. The Explanation inserted in Rule 2(l) of CCR vide Notification no. 2/2016-ST is for the purpose of explaining the meaning of “sales promotion”. The language of the explanation is consistent with the Board Circular to the benefit of the assessee and it will be effective retrospectively. It was thus held that

32 Tax Digest

CENVAT credit admissible in respect of commission paid to overseas agents.

Essar Steel India Ltd. Vs. Commissioner of Central Excise and Service tax, Surat-I [2016-TIOL-520-CESTAT-AHM]

Tribunal, Mumbai

Turnover with respect to onsite services will be considered under export turnover as well as total turnover for the purpose of computing refund under Rule 5 of CCR

CENVAT Credit Rules, 2004; in favor of assessee

Assessee had filed a refund claim under Rule 5 of CCR for the period December 2011 to March 2012. However, while computing the same, it did not consider the onsite services provided by it through their overseas branch, either in the export turnover or total turnover. It was of the view that the turnover of the Indian head office alone is to be considered while applying for refund under Rule 5. The adjudicating authority added the turnover with respect to onsite services in the total turnover, and not in the export turnover, thereby, reducing the refund. Accordingly, the issue before the Tribunal was whether for the purpose of computing refund under Rule 5 of CCR, turnover with respect to onsite services should be considered under export turnover and/or total turnover.

Tribunal held that it is not in dispute that the payment for such services is received in convertible foreign exchange and this is the only essential condition for qualifying it as export. In view of this, it was held that the onsite services provided through overseas branch of the assessee is export of service. Therefore, according to Notification No 5/2005 – CE (NT) dated 14 March 2006, value of such onsite services will be included in export turnover as well as total turnover, and the ratio of the refund will be computed accordingly.

CCE Pune – III vs. Zensar Technologies [TS-740-CESTAT-2015-ST]

VAT High Court, Punjab and Haryana

Mobile phone charger is an accessory for mobile phone and is not its part

Punjab Value Added Tax Act, 2005; in favor of revenue

The assessee was a manufacturer and seller of consumer electronics, IT and telecom products. It was a registered dealer under the provisions of the Punjab Value Added Tax Act, 2005 (PVAT Act). It was engaged inter alia in selling of mobile phones and accessories. In case of sale of mobile phones, the assessee also packed and supplied mobile chargers, batteries, earphones, data cables etc., in one single package to make it one composite box put up for retail sale. The mobile phone box contained battery charger and VAT was discharged at the time of sale of the box at the rate of 5.5% as per Entry No. 60(6)(g) of Schedule B of the Act. According to the invoice, VAT was charged on the price mentioned on the box, which contains mobile phone as well as the battery, charger, data cable etc. The issue before the HC was whether the battery charger is to be considered as a part of mobile phone or an accessory to the mobile phone.

HC placed reliance on the SC ruling in case of Nokia India Pvt. Ltd. (2014-TIOL-100-SC-VAT) wherein it was held that battery charger is not a part of the mobile/cell phone. It was an accessory to the mobile phone and hence, was not a part of the mobile phone. The battery charger was a separate item and was distinguishable from mobile phones and therefore, it was liable to be taxed according to the residuary entry of the PVAT.

The assessee could not substantiate its claim that the battery charger forms a part of the mobile. Therefore, by applying the ratio of SC ruling in case of Nokia India Pvt. Ltd. HC dismissed the petition filed by the assessee.

Samsung India Electronics Private Ltd. v. State of Punjab and another [2015-TIOL-2720-HC-P&H-VAT]

High Court, Delhi

Disposal of repossessed cars by the Bank on account of default in repayment of car loan constitutes a sale under the Delhi Sales Tax Act, 1975 (DST)

The Delhi Sales Tax Act, 1975; in favor of revenue

33 Tax Digest

The assessee was a foreign company carrying on banking business in India. It also makes advances for purchase of cars repayable in monthly instalments. The cars, which are financed, are hypothecated to the assessee as security. However, the possession of cars continues with the borrowers. According to the terms and conditions of the loan agreement, in case of default in repaying the loan instalments by the borrower, the assessee has the right to repossess the car and sell it in order to recover outstanding dues. The issue before the HC is whether disposal of the repossessed car can be considered as sale under DST and taxability on such sale.

The HC observed that the agreement contains clauses empowering the assessee to repossess a vehicle in the event of a default and also to bring the vehicle for sale through public auction. According to the definition of the dealer under section 2(e) it includes an auctioneer who sells or auctions goods belonging to any principal, whether disclosed or not. Therefore, according to the definition and based on the various judgments of other states HC held that the assessee was a “dealer” within the meaning of Section 2(e) read with section 2(c) of DST Act. Additionally, the sale of repossessed cars by the assessee was a “sale” within the meaning of Section 2(m) of DST, since it is made by the assessee on the strength of the letter of authorization executed in its favor by the borrower. Furthermore, the definition of the business is an inclusive one and therefore, selling of assets by way of auction forms a part of permissible business activity and is considered as an incidental or ancillary to its main banking business.

Therefore, in the view of above, it was held the assessee was covered as dealer and hence, was liable to discharge sales tax on such sales.

Citi Bank. v. Commissioner of Sales Tax [2015-TIOL-2842-HC-DEL-CT]

High Court, Allahabad

Transfer of right to use goods in the same form is considered as a sale under CST and VAT

Central Sales Tax Act, 1956 and Uttar Pradesh Value Added Tax Act, 2008; in favor of assessee

The assessee was purchasing ice creams, processed food, frozen desserts, mango pulp etc., from Vadilal Industries

Limited and was selling the same through a chain of distributors within the state. The assessee was registered as dealer under the Uttar Pradesh Value Added Tax, 2008 (UPVAT). Furthermore, it made inter-state purchase of deep-freezers and tricycles and provided the same on lease to its distributors and dealers. These products are mentioned on certificate of registration (RC) issued under section 8(3)(b) of the CST Act. Based on the RC, the assessee applied for issuance of Form-C under the UPVAT to avail concessional rate of tax. Revenue contented that the assessee was not re-selling the said items in the same form and hence, amended the RC by deleting the said items. Accordingly, revenue rejected the assessee’s application for issuance of Form C.

HC observed that the deep-freezers and tricycles were re-sold to the distributors and dealers in the same form and condition as a transfer on the right to use the goods. Such “transfer of the right to use the goods” was a “sale” as defined under the CST and UPVAT. The goods purchased by the assessee were according to the products indicated in the RC and were clearly intended “for resale” by it. Therefore, the assessee was entitled for issuance of Form-C in order to avail concessional rate of tax. Furthermore, the HC held that amendment made in RC could not apply retrospectively.

Vadilal Enterprises Ltd. v. State of U.P. and Another [2016-VIL-28-ALH]

High Court, Karnataka

In absence of revised returns, contractor cannot claim higher deduction of land cost vis–a-vis original returns

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

The assessee was a builder and civil works contractor, carrying on the business of construction and sale of apartments. For the relevant tax periods the assessee had filed the returns showing cost of land as 45% of the sales consideration and paid VAT on the balance amount. The AO, however, rejected the land cost at 45%, but instead assessed it at 40% and assessed the tax. The assessee challenged the assessment order by filing appeals, where it claimed the land cost to be 50% of the sale consideration, instead of 45% as had been claimed in the returns. The

34 Tax Digest

appellate authority concluded that the land cost was more than 50%, but as the claim made in the returns filed by the assessee was only for 45% of the sale consideration, the land cost, for the purpose of calculation of tax, was taken at 45% only. The assessee contented that since the authority had accepted the land cost higher than 50%, no tax could be levied on such amount, which was beyond 50% of the sale consideration.

Therefore, the issue before the HC, was whether the assessee can be granted benefit over and above that what has been claimed in the returns filed by the assessee for relevant tax periods.

In this regard HC relied on the earlier judgments of Division Bench in case Infinite Builders and Developers, Bangalore [2013-VIL-153-KAR] and Centum Industries Pvt. Ltd., Bangalore [2014-VIL-235-KAR]. Therefore, the HC held that if the assessee fails to avail the benefit of filing revised return, then it is only the return which is filed, which has to be considered by the authorities and nothing more than what is claimed in the return that can be granted by the authorities to the assessee.

Nandi Constructions v. The State of Karnataka [2015-VIL-510-KAR]

35 Tax Digest

Key statutory updates

Customs

Guidelines for handling and storage of valuable goods that are seized/confiscated by the Department

In view of increased instances of loss/theft of high value goods from strong rooms/seized godowns, the CBEC has issued guidelines re-inforcing/re-iterating and in continuation of the existing instructions/circulars in this regard for strict compliance by all field formations. The previous instructions/guidelines in this regard will be deemed to be modified and revised to the extent specified in this notification.

Instructions dated 1 December 2015 F. No. 394/97/2015-Cus(AS)

24x7 clearance facility to be made available at Krishnapatam Sea Port in Nellore, Andhra Pradesh

Circular No. 01/2016 dated 6 January 2016

CBEC extends Indian Customs Single Window to other locations and other Participating Government Agencies

In order to reduce interface with Government agencies, dwell time and cost of doing business, the Central Government extends Single Window to more locations to provide importers/exporters a single point interface for Customs clearance of import and export goods.

Inter alia, implements system of online granting of “No Objection Certificate” (NoC) under ICES for imported goods coming under purview of (i) Drug Controller (ii) Animal Quarantine (iii) Wild Life Crime Control Bureau. It also, extends “Lab Module” feature, which automated the process of referring samples drawn from consignments to other testing facilities/laboratories such as those under the Textile Committee.

Circular No. 03/2016 dated 3 February 2016

Central Government notifies revised all industry rates of duty drawback for certain tariff heads with effect from 11 February 2016

Amends Notification No. 110/2015-Cus (NT) dated 16 November 2015

Notification No. 22/2016-Cus (NT) dated 8 February 2016

Prescribes procedure for renewal of Special Valuation Branch orders and ongoing Special Valuation Branch enquiries

Circular No. 04/2016 dated 9 February 2016

CBEC prescribes procedure for investigation of related party import cases and other cases by the Special Valuation Branches

Circular No. 05/2016 dated 9 February 2016

Revises structure of custom duty on supply of electricity from SEZ to domestic tariff area

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

Notification No. 09/2016-Cus dated 16 Feb 2016

►Central Government notifies Sikta (West Champaran, Bihar) as a Land Customs Station at Nepal frontier for import/export of goods from/to Nepal

Amends Notification No. 63/94-Cus (NT) dated 21 November 1994

Notification No. 28/2016-Cus (NT) dated 18 Feb 2016

36 Tax Digest

Anti-dumping duty (ADD) Notifications

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

Import of melamine tableware and kitchenware products originating in, or exported from the People’s Republic of China, Thailand and Vietnam

Notification No. 55/2015-Cus (ADD) dated 4 December 2015

Import of phthalic anhydride, originating in, or exported from Japan and Russia for a period of five year

Notification No. 56/2015-Cus (ADD) dated 4 December 2015

►Import of all kinds of plastic processing or injection molding machines, also known as injection presses used for processing or molding of plastic materials, with clamping force not less than 40 tons and not more than 1,000 tons originating in or exported from the People’s Republic of China

Notification No. 57/2015-Cus (ADD) dated 4 December 2015

►Import of Gliclazide, originating in, or exported from the People’s Republic of China

Notification No. 59/2015-Cus (ADD) dated 11 December 2015

Import of cold rolled flat products of stainless steel originating in, or exported from the People’s Republic of China, Korea, the European Union, South Africa, Taiwan (Chinese Taipei), Thailand and the US

Notification No. 61/2015-Cus (ADD) dated 11 December 2015

Import of Abendazole, originating in, or exported from the People’s Republic of China

Notification No. 62/2015-Cus (ADD) dated 14 December 2015

Import of mulberry raw silk (not thrown) of grade 3A and below, originating in, or exported from the People’s Republic of China, for a period of five years

Notification No. 01/2016-Cus (ADD) dated 28 January 2016

Import of melamine, originating in, or exported from the People’s Republic of China for a period of five years

Notification No. 02/2016-Cus (ADD) dated 28 January 2016

Notification No. 03/2016-Cus (ADD) dated 28 January 2016

The Central Government imposes provisional ADD for a period of six months on the following:

Import of methylene chloride originating in, or exported from the People’s Republic of China and Russia

Notification No. 58/2015-Cus (ADD) dated 08 December 2015

Import of purified terephthalic acid, originating in, or exported from the People’s Republic of China, Iran, Indonesia, Malaysia and Taiwan

Notification No. 60/2015-Cus (ADD) dated 10 December 2015

Countervailing Duty (CVD) Notification

Levy of definitive countervailing duty on import of castings for wind-operated electricity generators whether or not machined, in raw, finished or sub-assembled form, or as a part of a sub-assembly, or as a part of an equipment/component meant for wind-operated electricity generators originating in, or exported from the People’s Republic of China for a period of five years

Notification No. 01/2016-Cus (CVD) dated 19 January 2016

37 Tax Digest

Foreign Trade Policy (FTP)

Notification/Circulars

Releases list of products, which experienced a decline of more than 5% in exports in 2014–15 as compared to 2013–14 for re-fixation of annual average export obligation

Circular No. 04/2015-20 dated 16 December 2015

Reduction in document requirements while applying for IEC

Only two documents are required to be uploaded/submitted along with the digital photograph while applying for IEC from 29 January 2016 onward. Furthermore, applications for IEC/modification in IEC can be made only in online mode by applicants through digital signatures with effect from 1 April 2016.

Notification No. 34/2015-2020 dated 29 January 2016

Import of capital goods is not permitted under EPCG Scheme for generation/transmission of power

Notification No. 35/2015-2020 dated 1 February 2016

Trade Notices/Public Notices

Interest Equalization Scheme on pre and post shipment rupee export credit with effect from 1 April 2015

DGFT brings to the notice of trade and industry that the interest equalization scheme for pre and post shipment rupee export credit has been announced by the Government of India and notified vide RBI Circular No. DBR/Dir/BC.No.61/04.02.001/2015–16 dated 4 December 2015. The scheme is applicable with effect from 1 April 2015.

Trade Notice No. 09/2015 dated 8 December 2015

Prescribes procedure for modification/change in Branch Office/Head Office/Registered Office Address in IEC involving a change in jurisdictional RA

Public Notice No. 53/2015 dated 5 January 2016

Urges to service exporters to voluntarily obtain IEC to aid Government’s collection and analysis of authentic data to aid in policy making

Trade Notice No. 13/2015 dated 15 January 2016

Trade facilitation measures

DGFT has issued instructions to move toward an IT-enabled paperless and personal contact free environment. These instructions call for communications via electronic modes and put restraints on personal contact and physical document submissions.

Trade Notice No.14/2015 dated 19 January 2016

Prescribes procedure to deal with pending application for issuance of duty-free import authorization(s) (DFIA) and their transferability

Public Notice No. 56/2015 dated 22 January 2016

Amendment in ANF 2A of Appendices and Aayat Niryat forms (2015–2020)

In view of the change in document submission requirements for obtaining IEC, the DGFT has amended ANF 2A Appendices and Aayat Niryat Forms for putting into effect the new requirements.

Applicants can, with immediate effect, submit online application for IEC by uploading only two documents, besides their digital photograph. The manual mode of applications for IEC will cease to exist with effect from 1 April 2016 and only online applications for IEC/modification in IEC will be accepted with digital signatures with effect from 1 April 2016.

Public Notice No. 58/2015-2020 dated 1 February 2016

38 Tax Digest

SCOMET Export permission for ”Stock & Sale” purposes and for export of spare parts

SCOMET export permission for “stock and sale” to facilitate bulk export, which may cater to orders of multiple end users along with permission for export of spare parts has been granted. This will reduce transaction time and cost.

Public Notice No. 60/2015-2020 dated 3 February 2016

Closure of Advance Authorization licenses according to para 4.16(a) of FTP 2009–14, pending for want of payment to be received from foreign currency account of SEZ unit

There was no requirement for payment to be made by SEZ unit from a foreign currency account as this was not stipulated by FTP 2009–2014 and where Advance Authorization holder has made supplies and received payment in Indian Rupees, the closure/redemption/EODC may be allowed. It is further clarified that in the new FTP 2015–2020 it has been stipulated that such payment must be realized from a Foreign Currency Account of the SEZ unit.

Trade Notice No.16/2015 dated 10 February 2016

Press release

►Union Cabinet approves Trade Facilitation Agreement (TFA) of World Trade Organization (WTO)

The Union Cabinet, headed by the Prime Minister Shri Narendra Modi has approved the Proposal for Notification of Commitments under the Trade Facilitation Agreement (TFA) of World Trade Organization (WTO), ratification and acceptance of Instrument of Acceptance of Protocol of TFA to WTO Secretariat and constitution of National Committee on Trade Facilitation (NCTF).

TFA prescribes for expeditious movement/release and clearance of goods (including goods in transit). Furthermore, it provides measures for effective cooperation between customs and other appropriate authorities on trade facilitation and customs compliance issues in consonance with India’s “Ease of Doing Business” initiative.

It will come into force for notified members upon acceptance by 2/3 WTO members and to facilitate both domestic coordination and implementation, NTCF will be set up under Joint Chair of Secretary, Department of Revenue and Secretary, Department of Commerce.

Press release dated 17 Feb 2016

Central Excise

Clarification regarding suspension of benefits under North East Industrial and Investment Promotion Policy (NEIIPP), 2007 by DIPP and its bearing on Central Excise Duty Exemption

Clarifies that new units or units undertaking substantial expansion after 1 December 2014 and up to the cut-off date of 31 March 2017, will continue to be eligible for excise duty exemption under notification No. 20/2007-Central Excise dated 25 April 2007 notwithstanding suspension of benefits under NEIIPL, 2007 by DIPP.

Circular No. 1012/19/2015-CX dated 2 December 2015

Instructs withdrawal of pending cases relating to Excise duty, Service tax and Customs duty before HCs/CESTAT where identical matters have been decided by the SC

Instructions dated 17 December 2015 F.No.390/Misc./67/2014-JC

Reduction of Government litigation — revising monetary limits for filing appeals by the department before CESTAT/HCs and SC

CBEC revises monetary limits as provided by earlier instruction dated 17 August 2011 below which appeals related to Excise duty, Service tax and Customs duty should not be filed in the CESTAT, HCs and SC.

Revised limits are as below:

S.No. Appellate Forum Monetary Limit (in INR million)

1. CESTAT 1

2. High Courts 1.5

3. Supreme Court 2.5

CBEC has further clarified vide Instructions dated 1 January 2016 that these limits will apply on all pending appeals before HCs/CESTAT

Instructions dated 17 December 2015 F.No.390/Misc./2010-JC

Instructions dated 1 January 2016 F.No.390/Misc./163/2010-JC

39 Tax Digest

General guidelines for implementation of e-payment of refund/rebate

The CBEC has prescribed procedures and forms to field formations for e-payment by way of RTGS/NEFT of refund/rebate, which will replace ongoing processes of manual handing over/despatch of cheques in order to speed up the transfer of funds.

Circular No. 1013/1/2016-CX dated 12 January 2016

Inserts sunset clause of 31 March 2016 and denies benefit to goods on which certain specified processes have been undertaken with respect to exemption to new industrial units/units undertaking substantial expansion in specified areas of Jammu & Kashmir

CBEC has now amended Notifications No. 56/2002-CE & No. 57/2002-CE (which provide for exemption to new industrial units set up/units undertaking substantial expansion in specified areas of Jammu & Kashmir on or after 14 June 2002) to include a sunset clause. Accordingly, Excise exemption to industrial units will be available only for such units that have fulfilled the prescribed requirements prior and up to 31 March 2016.

Furthermore, the exemption will not apply to such goods, which have been subjected to specified processes amounting to manufacture in J&K.

Amends Notifications No. 56/2002-CE & No. 57/2002-CE dated 14 November 2002

Notification No. 03/2016–CE dated 22 January 2016

►Inclusion of show cause notices issued in relation to levy of CVD on vessels imported for breaking in the “Call Book”. Furthermore, CBEC instructs that no show cause notices should be issued to challenge availing of CVD CENVAT credit on ship breaking in the future

In view of an SLP being filed by the department before the SC on the question of levy of CVD on vessels being imported for breaking, the CBEC has instructed for show cause notices on the issue to be kept in call until the matter is decided upon by the Apex Court.

Furthermore, it has clarified that such CVD, if paid voluntarily, is eligible for being claimed as CENVAT credit for payment of Central Excise duty liability arising due to breaking of vessels and that show cause notices denying such credit are not warranted. Therefore, no such notices will be issued in the future.

Circular No. 1014/2/2016-CX dated 1 February 2016

CENVAT Credit

Notifies certificate issued by an appraiser of customs as a valid document for availing CENVAT Credit in respect of goods imported through an authorized courier

Notification No. 27/2015–CENT dated 31 December 2015

Amends CENVAT Credit Rules, 2004 to provide for availment of 100% CENVAT Credit of CVD paid by ship breaking units

Notification No. 01/2016–CENT dated 1 February 2016

Explanation to definition of input service under rule 2(l) of CENVAT Credit Rules, 2004 added to provide that sales promotion includes services by way of sale of dutiable goods on commission basis. Provides that CENVAT credit of duty paid as specified in Rules 3(1) will not be utilized for payment of Swachh Bharat Cess

Notification No. 02/2016–CENT dated 3 February 2016

Goods and Services Tax (GST)

Committee on possible tax rates submits Report on Revenue Neutral Rate (RNR) to Finance Minister

Key recommendations of the Report toward achieving revenue neutrality are as follows:

• ► RNR range to be 15% to 15.5% (Center and states combined)

• ► Standard rate to vary between 17% and 18%

• ► Low rate of 12% on merit goods

• ► High rate of 40% on demerit goods

• ► Eliminating taxes on inter-state trade (including the 1% additional duty)

• ► Bringing down overall exemptions to less than a 100 as compared to 300 currently

Press Release dated 4 December 2015

40 Tax Digest

Service tax

Applicability of Service tax on services received by apparel exporters in relation to fabrication of garments.

CBEC issues clarifications on the difference between job work and a service of manpower supply by listing characteristics of both. The board has also examined a typical agreement, provided by the Apparel Export Promotion Council, in respect of outsourced services. The board opined that any agreement containing specified terms and conditions (as mentioned in the typical agreement) will be a job work agreement. Accordingly, it instructs that if fabrication of garments falls under the meaning of job work, on which Central Excise duty is levied, the same will be covered in the negative list and therefore not be chargeable to service tax.

Circular No. 190/9/2015-ST dated 15 December 2015

High Level Committee (HLC) recommendation regarding valuation of flats for levy of Service tax.

Ministry of Finance had set up a HLC to reconcile the divergent views between Education Guide 2012 and CBEC Circular No. 151/2/2012-ST dated 10 February 2012 regarding valuation of flats for levy of Service tax. The committee opined that the Circular dated 10 February 2012 is in accordance with the valuation provisions laid down in the Finance Act, 1994, whereas the Education Guide is merely an educational aid based on a broad understanding of a team of officers and hence, does not have a binding effect.

Therefore, HLC recommended that the Service tax authorities should be guided by the Circular No. 151/2/2012-ST while valuing service of construction provided by a builder/developer to a landowner, who transfers his land/development rights to builder, to obtain constructed flats/dwellings in return.

Instructions dated 20 January 2016 F.No.354/311/2015-TRU

CBEC amends Notification No. 41/2012-ST dated 29 June 2012 vide Notification No. 01/2016, thereby, allowing refund of Service tax paid on services used beyond the factory or any other place or premises of production or manufacture of goods, which are meant for export.

Notification No. 01/2016-ST dated 3 February 2016

Amendment to Notification No. 12/2013-ST to allow refund of Swachh Bharat Cess (SBC) to a SEZ unit or developer.

CBEC, vide Notification No. 02/2016, amends Notification No. 12/2013 dated 1 July 2013 to allow refund of Swachh Bharat Cess, to a SEZ unit or developer, in case of specified services on which ab-initio exemption is admissible but not claimed. Furthermore, CBEC also prescribes formula to calculate refund of SBC in respect of services that are common to authorized operations in SEZ and operation in domestic tariff area (DTA).

Notification No. 02/2016-ST dated 3 February 2016

CBEC amends Notification No. 39/2012-ST dated 20 June 2012 vide Notification No. 03/2016-ST dated 3 February 2016 to provide for rebate of Swachh Bharat Cess paid on all services, used for providing services exported in terms of rule 6A of the Service Tax Rules, 1994.

Notification No. 03/2016-ST dated 3 February 2016

CBEC notifies Service Tax and Central Excise (Furnishing of Annual Information Return) Rules, 2016

The Rules, which come into force on 1 April 2016 require for information in Form AIRF to be filed electronically by:

• Reserve Bank of India (RBI) in respect of details of foreign remittances for the receipt of specified services whose value exceeds INR5 million in a financial year.

• State Electricity Board or an electricity distribution or transmission licensee or other specified entities, in respect of electricity consumed by manufacturers, using

41 Tax Digest

an induction furnace or rolling mill to manufacture base metals and articles thereof and whose aggregate value of clearances exceeds INR15 million in the financial year.

This information return is required to be filed on or before 31 December of the financial year following the financial year to which the return pertains.

Notification No. 04/2016 dated 15 February 2016

Notification No. 22/2015 dated 6 November 2015 amended vide Notification No. 05/2016 dated 17 February 2016 to provide for exemption from levy of Swachh Bharat Cess to those services, which are exempt vide special order issued under Section 93 of Finance Act, 1994.

Notification No. 05/2016 dated 17 February 2016

Provisions of section 109(1) of the Finance Act, 2015 made applicable from 1 April 2016

Vide Notification No. 6/2016-ST dated 18 February 2016, the CBEC has notified 1 April 2016 as the effective date for application of provisions of section 109(1) of Finance Act, 2015. With effect from 1 April 2016, all services provided by the Government or local authority to a business entity, except the services that are specifically exempted, or covered by any other entry in the Negative List, will be liable to Service tax.

Notification No. 06/2016 dated 18 February 2016

Amendment to mega exemption Notification No. 25/2012-ST dated 20 June 2012.

CBEC, vide Notification No. 07/2016 dated 18 February 2016, amends mega exemption Notification No. 25/2012-ST to grant Service tax exemption to services provided by Government or a local authority to a business entity with turnover up to INR1 million in the preceding financial year.

Notification No. 07/2016 dated 18 February 2016

VAT

Delhi

Amendment regarding Rule 7 and 43 of the Delhi Value Added Tax Rules (DVAT), 2005

Delhi Government amends Rule 7 to reduce tax credit by 100% on unmanufactured tobacco, tobacco and tobacco products in all forms and all kinds of lubricants exported from Delhi other than by way of sale.

Furthermore, amends Rule 43 to provide that owner, driver or person in charge of goods vehicle will, in addition to transport receipt, sale invoice or delivery note and export/import declaration will carry any other document required by the Commissioner by way of a notification in Official Gazette in form and manner as may be prescribed.

Notification No. F.3 (25)/Fin (Rev-I)/2015- 2016/dvsi/954 dated 18 December 2015

Notification regarding Delhi Sugam-2

Delhi Sugam-2 (DS2) is required to be carried by the owner, driver or person in-charge of the goods vehicle, which is bringing the goods into Delhi and will produce the same as hard copy or in electronic form before any officer-in-charge of a check post or barrier or any other officer empowered by the Commissioner.

Notification No. F.7 (433)/Policy-II/VAT/2012/PF/1259-70 dated 8 January 2016

Amendment in Rule 28 of DVAT Rules 2005

According to the said amendment, Commissioner may, by notification, require a dealer or classes of such dealer to furnish return with digital signatures in accordance with provisions contained in Information Technology Act, 2000. Such dealers will not be required to submit Return Verification Form DVAT-56 for acknowledgement for return separately.

Notification No. F.3 (28)/Fin (Rev-I)/2015- 2016/dsvi/42 dated 11 February 2016

42 Tax Digest

Goa

Requirement of single annual e-return for certain dealers

Dealers, whose turnover for previous financial year is INR2.5 million and below, except those who have opted for composition of tax, will file a single annual return of their sales in Form VAT III online, through the electronic system. The first compulsory e-return for financial year 2015–16 will be filed by 30 April 2016.

Notification No. No. 4/5/2005-Fin(R&C) (131) dated 29 December 2015

Karnataka

Karnataka Government issues guidelines on input tax refunds to co-developers of SEZ

• A registered dealer under the Karnataka Value Added Tax Act, 2003 (KVAT) being a co-developer of an SEZ is eligible for refund tax paid on purchase of inputs (other than petroleum products) subject to production of Certificate issued by the Directorate of Industries & Commerce.

• The co-developer will be eligible for refund only if such inputs are purchased for the purpose of setting up, operation or maintenance of the processing area in a SEZ for the authorized operations and not for that of a non-processing area. This benefit will be available with effect from 28 February 2009 or from SEZ Notification, whichever is earlier.

• Provisions of Section 20(2) of the KVAT and Rule 130-A of Karnataka Value Added Rules, 2005 applicable to a developer of SEZ will apply mutatis mutandis to a co-developer of SEZ. Prescription under Rule 130-A (3) to file a statement giving the details of each purchase made by such co-developer and the purpose for which it was purchased is mandatory.

Circular No. 17/2015-16 dated 4 December 2015

Clarification regarding rate of tax applicable on “servicing of poultry machines”

Karnataka Government clarifies that VAT is payable @ 14.5% on taxable turnover of transfer of property in goods after deducting allowable deductions according to Rule

3(2) of KVAT Rules, 2005. VAT is not payable on labor and like charges not involving transfer of property in goods.

Clarification No. CLR.CR.69/2014-15 dated 10 December 2015

Maharashtra

►Facility for downloading digitally signed registration certificate

Maharashtra Government introduced the facility to download digitally signed registration certificates from the website of the Maharashtra Sales Tax Department. Such facility is made available to dealers to whom VAT registration certificate has been granted on or after 22 December 2015.

Circular No. 19T of 2015 dated 21 December 2015

►Maharashtra Government inserts Rule 52B to the Maharashtra Value Added Tax Rules, 2005

Rule 52B provides for set-off in respect of aerated and carbonated non-alcoholic beverages and cigarettes/cigars purchased by dealer. Furthermore, the setoff will be only to the extent of aggregate of:

• Taxes paid/payable under CST Act on inter-state resale of corresponding goods

• Taxes paid on purchases of said goods, if resold locally

Moreover, the set-off will be claimed only in the month in which corresponding sales of such goods are affected by claimant dealer. Nothing in this rule will apply to the purchases of such goods, which are sold in the course of export.

Notification No. VAT1515/CR-158/Taxation-1 dated 30 December 2015

Government of Maharashtra restructures Maharashtra Sales Tax Department

• The Maharashtra Government undertakes restructuring of the Sales Tax Department, thereby changing the present functional set-up into a single desk multi-functional set-up wherein dealers will be allocated to “Nodal Officers”.

43 Tax Digest

• Under this system, each dealer will have a Nodal Officer who will look after all functions of amendment and cancellation of registrations, returns follow up, audits/assessments/issue-based audits, processing refunds, issuance of CST forms, cross checks and recovery of dues.

• Allocation of dealers to Sales Tax Officers will be Pin Code wise and for deputy commissioners and assistant commissioners it will be based on load factor.

• Reshuffling will take place from 1 January 2016 onward. Therefore, there will be no change in the Appellate Authority pertaining to any of the Assessing Authority for demand notices issued till 31 December 2015.

Trade Circular No. 20T of 2015 dated 31 December 2015

Rajasthan

►Introduction of amnesty scheme

An amnesty scheme has been introduced for dealers or persons whose total outstanding demand up to 30 June 2015 under the Rajasthan Sales tax, VAT or CST Act is less than INR150 Million. The scheme provides for waiver from interest and penalty subject to the fulfilment of prescribed conditions. The scheme will remain in force up to 15 March 2016.

Notification No. F.12 (16)/FD/Tax/2009-116 dated 21 January 2016

Telangana

Issuance of e-waybills by dealers has been made mandatory, with effect from 1 February 2016

Circular No. Enft./D2/172/2010 dated 1 December 2015

The Government of Telangana reduces the time limit for granting refund of tax claimed by the dealer under Section 38 of the Telangana Value Added Tax Act, 2005 from 90 days to 60 days

G.O. No. MS No. 235 dated10 December 2015

44 Tax Digest

RegulatoryAmendments in Foreign Exchange Management (Transfer or Issue of Security to a person resident outside India) Regulations, 2000

The RBI has issued Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Amendment) Regulations, 2016 amending Schedule 3 (Investment by NRI on a Stock Exchange in India on Repatriation basis under PIS) and Schedule 4 (Investment by NRI on Non-repatriation basis) of Foreign Exchange Management (Transfer or Issue of Security to a person resident outside India) Regulations, 2000.

The Schedule 3 has been amended to permit NRIs to purchase and sell warrants of an Indian company and units of an investment vehicle [Real Estate Investment Trust (REIT), Infrastructure Investment Trust (InVit) and Alternative Investment Fund (AIF)] under Portfolio Investment Scheme (PIS) on stock exchanges. All the other conditions are accordingly amended in the said schedule. Schedule 4 has also been amended to permit NRIs, including a company, a trust and a partnership firm incorporated outside India and owned and controlled by NRIs, to make investment on a non-repatriation basis without any limit, in the following:

• ► Any security issued by a company either on the stock exchange or outside it;

• ► In units issued by an investment vehicle either on the stock exchange or outside it; or

• ► Contribute to the capital of a partnership firm, a proprietary firm or Limited Liability Partnerships (LLP)

The above changes in Schedule 4 will also allow NRIs/body corporates owned by the NRI, to invest on a non-repatriation basis in units of REIT/InVit/AIF and LLPs.

Source: Notification No.FEMA.361/2016-RB dated 15 February 2016

Foreign Exchange Management Act (FEMA) 1999

Amendments in Foreign Exchange Management (Transfer or Issue of Security to a person resident outside India) Regulations, 2000 pursuant to Press Note 12 of 2015

The RBI has incorporated the changes announced by DIPP in the extant Foreign Direct Investment (FDI) policy (vide Press Note 12 of 2015) and other amendments issued by it during the year in the principal FDI regulations. The RBI has made few important additions/modifications while incorporating these changes in the principal FDI regulations. The amendment made in the relevant Schedule, i.e., Schedule 11 allows LLPs to act as a sponsor, manager or investment manager of an investment vehicle. Earlier there was a restrictive clause in Schedule 11, restricting LLPs to act as a sponsor or manager/ investment manager of an AIF.

Source: Notification No.FEMA.362/2016-RB dated 15 February 2016

45 Tax Digest

Foreign Direct Investment Policy (FDI policy)

Reserve Bank of India (RBI)

Regulatory relaxations in respect of start-ups

The RBI vide its Press Release dated 2 February 2016, had announced that in case of start-ups, certain permissible transactions under the existing regulatory framework will be clarified. Accordingly, the RBI has, in respect of issue of shares by start-ups to foreign investors, made the following relaxations on similar lines, as it is currently available to any other Indian company under FEMA:

• ► Issue of shares without cash payment through sweat equity: The RBI vide Notification No. FEMA.344/2015 RB date 11 June 2015 has permitted Indian companies to issue sweat equity, subject to conditions, inter-alia, that the scheme has been drawn either in terms of regulations issued under the Securities Exchange Board of India Act, 1992 in respect of listed companies or the Companies (Share Capital and Debentures) Rules, 2014 notified by the Central Government under the Companies Act 2013 in respect of other companies.

• ► Issue of shares against legitimate payment owed: The RBI, vide Notification No. FEMA.315/2014-RB dated 10 July 2014, has permitted Indian companies to issue equity shares against any other funds payable by the investee company (e.g. payments for use or acquisition of intellectual property rights, for import of goods, payment of dividends, interest payments, consultancy fees, etc.), remittance of which does not require prior permission of the Government of India or the RBI under FEMA, 1999 subject to conditions relating to adherence to FDI policy including sectoral caps, pricing guidelines, etc., and applicable tax laws.

Therefore, both the aforementioned relaxations are made equally available to any eligible start-up according to the start-up policy announced by the Government of India as on 16 January 2016.

Source: A.P. (DIR Series) Circular No. 52 dated 11 February 2016

Clarifications with respect to accepting payment on behalf of overseas subsidiaries of start-ups under the existing FEMA regime

The RBI, as a step toward facilitating ease of doing business for start-ups, clarified on certain permissible transactions under the existing FEMA regime. In

connection with accepting payments on behalf of overseas subsidiaries of start-ups, the RBI has made following clarifications:

• ► A start-up in India with an overseas subsidiary is permitted to open foreign currency account abroad to pool the foreign exchange earnings out of the exports/sales made by the concerned start-up;

• ► The overseas subsidiary of the start-up is also permitted to pool its receivables arising from the transactions with the residents in India as well as the transactions with the non-residents abroad into the said foreign currency account opened abroad in the name of the start-up;

• ► The balances in the said foreign currency account as due to the Indian start-up should be repatriated to India within a period as applicable to realization of export proceeds (currently nine months);

• ► A start-up is also permitted to avail of the facility to realize the receivables of its overseas subsidiary or making the above repatriation through Online Payment Gateway Service Providers (OPGSPs) for value not exceeding US$10,000 (US Dollar ten thousand) or up to such limit as may be permitted by the RBI from time-to-time under this facility; and

• ► To facilitate the above arrangement, an appropriate contractual arrangement between the start-up, its overseas subsidiary and the customers concerned should be in place.

It may be noted that to facilitate the above arrangement, an appropriate contractual arrangement between the start-up, its overseas subsidiary and the customers concerned should be in place.

Source: A.P. (DIR Series) Circular No. 51 dated 11 February 2016

RBI issued revised principal regulations on different subjects under FEMA

The RBI has revised principal regulations released under FEMA on difference subjects. The said notified regulations will replace the existing principal regulations. Some of the revised regulations released by the RBI are as under:

• ► Foreign Exchange Management (Foreign currency accounts by a person resident in India) Regulations, 2015;

46 Tax Digest

• ► Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations, 2015;

• ► Foreign Exchange Management (Realisation, repatriation and surrender of foreign exchange) Regulations, 2015;

• ► Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2015;

• ► Foreign Exchange Management (Export and Import of Currency) Regulations, 2015; and

• ► Foreign Exchange Management (Export of Goods and Services) Regulations, 2015

Source: Press Release No. 2015-2016/1836 dated 4 February 2016

Settlement of export/import transactions permitted in currencies not having direct exchange rate

Currently, the export proceeds for exports from India and import payments for imports into India may be received in any mode complying with directions issued by the RBI. In order to liberalize the procedure and facilitate settlement of export/import transactions where invoicing is in a freely convertible currency and does not have a direct exchange rate, it has been decided to permit AD banks to facilitate such transactions subject to the following conditions:

• ► Exporter/importer will be a customer of the AD Bank;

• ► Signed contract/invoice is in a freely convertible currency

• ► The beneficiary is willing to receive the payment in the currency of beneficiary instead of the original (freely convertible) currency of the invoice/contract/Letter of Credit as full and final settlement;

• ► AD bank is satisfied with the bonafides of the transactions; and

• ► The counterparty to the exporter/importer of the AD bank is not from a country or jurisdiction in the updated FATF Public Statement on High Risk & Non Co-operative Jurisdictions on which FATF has called for counter measures.

Source: A.P. (DIR Series) Circular No. 42 dated 4 February 2016 read with Master Direction No. 16 and 17 of 2015-16 dated 1 January 2016

Mandatory filing of Form FCTRS, FCGPR and ARF on e-Biz platform and discontinuation of physical filing w.e.f. 8 February 2016

The RBI has, in order to promote ease of filings related to FDI, enabled mandatory online filing of Form FCTRS, FCGPR and Advance Remittance Form (ARF) with effect from 8 February 2016 through e-Biz portal.

Furthermore, the transactions to which each of the above respective forms pertains to, are as under:

• ► Advance Remittance Form (ARF) is used by the companies to report the FDI inflows to RBI;

• ► Form FCGPR is submitted by a company to the RBI for reporting the issue of eligible instruments to the overseas investor against the above mentioned FDI inflow; and

• ► Form FCTRS is submitted to RBI for transfer of securities between a resident and a person resident outside India

Source: A.P. (DIR Series) Circular No. 40 dated 1 February 2016

RBI replaces master circulars with master directions to be issued annually during the month of January

The RBI has, in order to consolidate instructions on rules and regulations framed under various Acts including banking issues and foreign exchange transactions, issued master directions on different subjects including External Commercial Borrowings (ECB), import of goods and services, export of goods and services, overseas direct investment (ODI), remittance of assets, deposits and accounts, establishment of Liaison Office (LO)/Branch Office (BO)/ Project Office (PO) etc. The said directions have been issued on 4 January 2016 but will be effective retrospectively from 1 January 2016.

Moreover, a separate master direction on “Reporting under FEMA” has been issued, which is a compilation of all the instructions and forms to be filed in respect of different transactions under FEMA. With these directions the existing set of Master Circulars issued on various subjects as on July 2015 have been withdrawn.

Source: Master Directions dated 4 January 2016

47 Tax Digest

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

In the pressToward a taxpayer-friendly income tax regimeSunil Kapadia- The Financial Express

E-governance to increase efficiencyPranav Sayta – Business Standard

Corporate tax levers to boost investmentKT Chandy – NDTV

What is in store for tax payersAmarpal .S. Chadha - Economic Times

Budget expectations: mining and metals sectorPrashant Khatore - CNBC TV18

Expectations of the power sectorKuljit Singh - CNBC TV18

Telecom sector’s expectationBipin Sapra - CNBC TV18

Tax easing to benefit FMCG Aashish Kasad - CNBC TV18

Expect further rise in service tax rate, pruning in list of excise exemptionsAbhishek Jain – Business Today

Expectations from service taxAbhishek Jain - The Financial Express

Simplify income tax return filing processAnand Dhelia – NDTV

Make transfer pricing regime more predictableAshwin Vishwanathan – NDTV

Pharma to grow at 15%; GST awaited Hitesh Sharma - CNBC TV18

Budget Cafe 2016: looking forward with sanguinity Pranav Sayta - The Financial Express

Refueling India’s energy growth Raju Kumar - CNBC TV18

IT sector’s expectations Ravi Mahajan - CNBC TV18

Need for PAN in financial transactionsShalini Jain - The Economic Times

Budget Cafe 2016: Great expectations from tax proposalsSudhir Kapadia - The Financial Express

BFSI: structural changes needed with tax clarityTejas Desai – Business Today

Address e-commerce, digital industry concernsVivek Pachisia – NDTV

Bringing service tax closer to GSTAbhishek Jain- The Financial Express

Bring clarity in taxes, reduce litigationGarima Pande - Business Today

Personal tax: what the common man wantsMayur Shah - Business Today

Wider tax base and disinvestmentRahul Acharya - The Financial Express

International tax changes on the agendaRajendra Nayak - Business Today

Simplify and rationalize corporate taxRavi Mahajan - Business Today

Infrastructure requires more tax sopsSamir Kanabar - Business Today

Work on automobile R&D, clunkers scheme, exciseSarika Goel - The Financial Express

Simplified, litigation-free and predictable taxShweta Aggarwal - The Financial Express

Start-up benefits to retailAashish Kasad - Business Today

Simplify telecom taxVishal Malhotra - The Financial Express

Individual taxpayers’ expectationsSurabhi Marwah – The Economic Times

Changes in indirect tax exemptions and complianceDivyesh Lapsiwala – DNA

Bury retro tax ghostSudhir Kapadia - CNBC TV18

Make in India: learnings from our successKeval Doshi – Mint

Holding threshold to be 3 years for capital assets?Amarpal Chadha – The Economic Times

Scrap dividend distribution tax for previous regimeKeval Doshi – DNA

Tweaking in service tax rates?Uday Pimprikar - The Economic Times

A budget to achieve socialist objectives for the poorSudhir Kapadia - The Economic Times

Fiscal consolidation or stimulus to growth?D.K. Srivastava – Mint

Boost to start-ups, manufacturingGanesh Raj - The Financial Express

Reformist budget to drive growthRajiv Memani – Mint

For economy, it is more of the sameSatya Poddar - Business Standard

48 Tax Digest

Direct Tax

Compilation of Tax Alerts

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

1 CBDT announces proposed changes to compulsory quoting of PAN rules with effect from 1 January 2016

17 December 2015 CBDT Press Release dated 15 December 2015

2 CBDT amends rules relating to furnishing information in respect of payments to nonresidents

18 December 2015 Income-tax (21st Amendment) Rules, 2015 [F.NO.133/41/2015- TPL]/G.S.R. 978(E), dated 16 December 2015

3 Central Board of Direct Taxes issues draft Guidelines for determination of Place of Effective Management for corporate residency

24 December 2015 CBDT Press release dated 24 December 2015

4 CBDT notifies substantive changes in PAN reporting rules and Annual Information Reporting

8 January 2016 CBDT Notification No. 95 dated 30 December 2015

5 SC rules land under construction liable to wealth tax levy

11 January 2016 Giridhar G. Yadalam v. Commissioner of Wealth Tax

[TS-758-SC-2015]

6 Updated Guidance Note on Implementation of Reporting Requirements under Rules 114F to 114H of the Income-tax Rules, 1962- Key additions/clarifications

13 January 2016 Updated version of Guidance Note released on 31 December 2015 by Government of India

7 Recent amendments to the Payment of Bonus Act, 1965

18 January 2016 Amendments in the Payment of Bonus Act, 1965 through the Payment of Bonus (Amendment) Act 2015

8 Mumbai Tribunal rules buyback enabling shareholder exit is not “reorganization” under Article 13(5) of India-Netherlands Tax Treaty

21 January 2016 Accordis Beheer B.V. v. DIT

[TS-10-ITA-2016(Mum)]

9 Provident Fund compliance for India outbound employees

22 January 2016 Guidance issued by PF on 20 January 2016 in relation to PF compliance

10 AAR rules that transfer of shares of Indian subsidiary by a Mauritius company to a Singapore group entity is not a tax avoidant transaction

25 January 2016 Dow AgroSciences Agricultural Product Ltd.

[TS-15-AAR-2016]

11 Karnataka HC rules on additional depreciation benefit in second year for assets put to use in latter half of first year

2 February 2016 CIT v. Rittal India Pvt. Ltd.

[TS-29-HC-2015(KAR)]

12 Mumbai Tribunal rules buyback transaction taxable as capital gains, exempt under India-Mauritius Tax Treaty; even if considered as dividend, tax withholding does not apply

17 February 2016 Goldman Sachs (India) Securities Ltd. v. ITO

[TS-72-ITAT-2016(Mum)]

49 Tax Digest

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

13 Ahmedabad Tribunal permits resulting company to claim credit of advance tax, TDS and MAT credit pertaining to the demerged undertaking

18 February 2016 Adani Gas Ltd. v. ACIT

[TS-54-ITAT-2016(Ahd)]

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

22 February 2016 Hyosung Corporation v. AAR

[TS-77-HC-2016 (Del)]

15 Restrictions on Provident Fund withdrawal and other notifications

22 February 2016 Amendments made to Employees’ Provident Funds Scheme, 1952 w.e.f 10 February 2016

16 Indian tax administrative body clarifies nature of share buy-back transaction undertaken prior to 1 June 2013 as capital gains

27 February 2016 Circular No. 3 of 2016, dated 26 February 2016

17 Administrative circulars clarifying applicability of withholding tax on certain transactions of television channels/broadcasters

4 March 2016 Circular No. 04/2016 and 05/2016 dated 29 February 2016

50 Tax Digest

Indirect Tax

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

1 Supreme Court rules that meal vouchers cannot be treated as goods, hence not liable to Octroi or Local Body tax

11 December 2015 Sodexo SVC India Pvt. Ltd. v. State of Maharashtra and others

[2015-TIOL-293-SC-MISC]

2 SC rules that pre-delivery inspection and after sales service charges not to be included in the assessable value for paying Excise duty

23 December 2015 CCE v. TVS Motor Company Ltd.

[2015-TIOL-299-SC-CX]

3 CENVAT Credit Rules, 2004 amended to provide for availment of 100% CENVAT credit of CVD paid by ship breaking units

9 February 2016 Amendment in Rule 3(1)(vii) of the CENVAT Credit Rules, 2004 (CCR)

4 AAR rules that activity of supply and installation of “ESCIM” System qualifies as transfer of right to use goods and hence not a Service

10 February 2016 SICPA India Pvt. Ltd.

[2016-TIOL-03-ARA-ST]

5 CBEC issues Circulars laying down procedure for investigation of related party import cases by Special Valuation Branch of Customs

12 February 2016 CBEC Circulars No. 4/2016 and 5/2016 dated 9 February 2016

6 CBEC releases Central Excise and Service Tax Audit Manual, 2015

15 February 2016 CBEC releases Central Excise and Service Tax Audit Manual 2015

7 CBEC notifies Service Tax and Central Excise (Furnishing of Annual Information Return) Rules, 2016

18 February 2016 CBEC Notification No. 4/2016 dated 15 February 2016

8 Notifications relating to taxability of services provided by Government to business entities

19 February 2016 Ministry of Finance Notifications no. 6/2016-ST and no. 7/2016-ST dated 18 February 2016

9 SC rules that the period for repayment of deferred sales tax under state incentive scheme has to be computed from the date of grant of eligibility

19 February 2016 State of Jharkhand v. Tata Steel Ltd. & Ors

[TS–36–SC–2016-VAT]

10 Guidelines and notification issued by the Government for power generation, transmission and distribution in Special Economic Zones

23 February 2016 Customs Notification No. 9 dt 9 February 2016, , SEZ Notification dt 16 February 2016

51 Tax Digest

Regulatory

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

1 SEBI Circular dated 30 November 2015 governing procedure and approvals to be undertaken by Listed Entities involved in any Scheme of Arrangement

4 December 2015 SEBI circular CIR/CFD/CMD/16/2015 dated 30 November 2015

2 Division Bench of Punjab & Haryana High Court upholds maintainability of Composite Scheme of restructuring under the corporate laws

23 December 2015 Judgement dated 10 December 2015 by Punjab and Haryana High Court

3 IRDA issues Regulations on Issuance of Capital by Indian Insurance Companies transacting other than life insurance business

30 December 2015 IRDA notifies the Insurance Regulatory and Development Authority of India (Issuance of Capital by Indian Insurance Companies transacting other than Life Insurance Business) Regulations, 2015

4 Insurance Regulatory and Development Authority of India issues guidelines on ‘Indian owned and controlled’

30 December 2015 IRDA Circular IRDA/F&A/CIR/CPM/224/ 12/2015 dated 23 December 2015

5 SEBI releases the report submitted by the Alternative Investment Policy Advisory Committee

27 January 2016 First report of the Committee constituted by SEBI

6 MCA releases draft rules on NCLT and schemes of compromises/arrangements, for public comments

5 February 2016 The key highlights of certain procedural and documentation requirements of NCLT pertaining to the schemes of compromises /arrangement under the corresponding provisions of the Companies Act, 2013

7 Committee suggests sweeping changes to Companies Act, 2013 - open for public comments

8 February 2016 The key recommendations of the Companies

Ernst & Young LLP

EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

Ernst & Young LLP is one of the Indian client serving member firms of EYGM Limited. For more information about our organization, please visit www.ey.com/in.

Ernst & Young LLP is a Limited Liability Partnership, registered under the Limited Liability Partnership Act, 2008 in India, having its registered office at 22 Camac Street, 3rd Floor, Block C, Kolkata - 700016

© 2016 Ernst & Young LLP. Published in India. All Rights Reserved.

EYIN1603-021 ED None

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

RS

Ahmedabad2nd floor, Shivalik Ishaan Near C.N. VidhyalayaAmbawadiAhmedabad - 380 015Tel: + 91 79 6608 3800Fax: + 91 79 6608 3900

Bengaluru6th, 12th & 13th floor“UB City”, Canberra BlockNo.24 Vittal Mallya RoadBengaluru - 560 001Tel: + 91 80 4027 5000 + 91 80 6727 5000 Fax: + 91 80 2210 6000 (6th & 12th floor)Fax: + 91 80 2224 0695 (13th floor)

1st Floor, Prestige Emerald No. 4, Madras Bank RoadLavelle Road JunctionBengaluru - 560 001Tel: + 91 80 6727 5000 Fax: + 91 80 2222 4112

Chandigarh1st Floor, SCO: 166-167Sector 9-C, Madhya MargChandigarh - 160 009 Tel: + 91 172 671 7800Fax: + 91 172 671 7888

ChennaiTidel Park, 6th & 7th Floor A Block (Module 601,701-702)No.4, Rajiv Gandhi Salai, Taramani Chennai - 600113Tel: + 91 44 6654 8100 Fax: + 91 44 2254 0120

HyderabadOval Office, 18, iLabs CentreHitech City, MadhapurHyderabad - 500081Tel: + 91 40 6736 2000Fax: + 91 40 6736 2200

Kochi9th Floor, ABAD NucleusNH-49, Maradu POKochi - 682304Tel: + 91 484 304 4000 Fax: + 91 484 270 5393

Kolkata22 Camac Street3rd floor, Block ‘C’Kolkata - 700 016Tel: + 91 33 6615 3400Fax: + 91 33 2281 7750

Mumbai14th Floor, The Ruby29 Senapati Bapat MargDadar (W), Mumbai - 400028Tel: + 91 022 6192 0000Fax: + 91 022 6192 1000

5th Floor, Block B-2Nirlon Knowledge ParkOff. Western Express HighwayGoregaon (E)Mumbai - 400 063Tel: + 91 22 6192 0000Fax: + 91 22 6192 3000

NCRGolf View Corporate Tower BNear DLF Golf CourseSector 42Gurgaon - 122002Tel: + 91 124 464 4000Fax: + 91 124 464 4050

6th floor, HT House18-20 Kasturba Gandhi Marg New Delhi - 110 001Tel: + 91 11 4363 3000 Fax: + 91 11 4363 3200

4th & 5th Floor, Plot No 2B, Tower 2, Sector 126, NOIDA 201 304 Gautam Budh Nagar, U.P. IndiaTel: + 91 120 671 7000 Fax: + 91 120 671 7171

PuneC-401, 4th floor Panchshil Tech ParkYerwada (Near Don Bosco School)Pune - 411 006Tel: + 91 20 6603 6000Fax: + 91 20 6601 5900

EY offices