India: Tax Update – Vol.5, Issue 3, August 2015

Last Updated: 24 September 2015
Article by HSA Advocates

INCOME TAX

Caselaws

A subsidiary company is not liable to deduct tax at source in respect of the reimbursement of expenses paid to its holding company

The Taxpayer is a subsidiary of M/s PSO Beheer, B.V., Netherlands, and is engaged in the activity of certification in respect of quantity, quality, pre-shipment inspections, surveys etc. During the relevant assessment year, the Taxpayer paid certain amount to its holding company towards reimbursement of expenses and no tax was deducted as the same was a reimbursement.

The AO disallowed the entire expenditure towards reimbursement of expenses u/s 40(a)(ia) of the IT Act on the ground that the Taxpayer had failed to withhold tax while making payment to its holding company.

On appeal, the ITAT observed that the amount paid by Taxpayer to its holding company was only reimbursement of expenses, as the agreement between the two provides that the holding company would provide various services such as Accounting services, Legal and Professional services, Communication and R & D services to its group companies including the Taxpayer. Therefore, there is no liability on the Taxpayer to withhold tax.

On further appeal by the Department, the Bombay HC held that, it is found that both the AO and lower appellate authority had allowed the amount paid as a deduction but denied the same only because tax on the said amount was not withheld. Thus, they have accepted that the amount paid was a reimbursement of expenses. It was further held that the obligation to withhold tax can only arise if the sum paid is chargeable to tax under the Act. Reimbursement of expenses can never be subjected to tax as income. Therefore, Appeal filed by the Department is dismissed.

CIT vs. C U Inspections India Pvt Ltd; 2015-TII-57-HC-MUM-INT

Reimbursement of amount by a foreign company to the Taxpayer towards payment of expatriate employees of the foreign company does not amount to FTS

The Taxpayer is a tax resident of USA. It acts as a payment agent for M/s Dow Chemical International (P) Ltd (DCIPL) for remitting the salary of expatriate employees working with DCIPL in their respective bank accounts in USA and get the same back as reimbursements from DCIPL. During the relevant assessment year, the Taxpayer had received certain amount as reimbursements from DCIPL.

The AO treated the reimbursement received by the Taxpayer as FTS.

On appeal, the DRP held that the Taxpayer had received only reimbursements from DCIPL and hence it shall not fall under the category of rendering managerial, technical or consultancy services by the Taxpayer to DCIPL.

On Appeal, the ITAT upheld the findings of the DRP and dismissed the Department appeal.

ADIT vs. Dcomco Inc Midland; 2015-TII-137-ITAT-MUM-INTL

No withholding tax on purchase of embedded software as the same amounts to business income and not royalty.

The Taxpayer is engaged in the business of providing cellular mobile telephone and wireless services. The Taxpayer had entered into a contract with Huawei for supply of system as whole which comprised both hardware and software and the software supplied was specifically designed for the hardware supplied and can be used only to make the hardware supplied under the contract, operational. The Taxpayer made payments for the above hardware and software without deduction of tax at source.

AO held that the above payment for software should be treated as royalty and that the Taxpayer ought to have withheld tax.

The ITAT held that the consideration paid by the Taxpayer for purchasing of embedded software was to be treated as supply of goods and, therefore, the same was taxable as business income and not as royalty.

ITO vs. Sistema Shyam Tele Services Ltd; 2015-TII-133-ITAT-DEL-INTL

Amount which is to be taxed in the hands of a company by virtue of having a PE in India, can be Rs. Nil as the PE has been compensated at arm's length and has offered the said compensation for tax in India

The Taxpayer Company, St. Jude Medical Inc. (SJMI) is incorporated in USA and is engaged in the business of marketing and selling of medical equipment. It has a wholly owned subsidiary in Hong Kong St. Jude Medical Hong Kong Ltd. (SJMHK). SJMHK had setup a liaison office in India which was converted into a Branch Office. Both SJMI and SJMHK made direct sales in India to some clients. Indian Branch office of SJMHK received management fees and the same was taxed. The management fee was computed on the basis of the direct sales of both the Taxpayer and SJMHK in India and it was declared to be at arm's length as per Transfer Pricing Officer.

During assessment, the AO held that the Indian branch of SJMHK was a PE in India of the Taxpayer and also a business connection in India of SJMHK. The AO accordingly held that a part of the direct sales made in India by SJMHK and the Taxpayer was attributable to the Indian Branch of SJMHK therefore taxable in India. The AO made an estimate of 20% (on adhoc basis) of the direct sales made in India by SJMHK and the Taxpayer and the same was attributed to the said PE.

The CIT(A) held that the two assessments i.e. of SJMHK and the Taxpayer cannot be made in a single assessment order and deleted the addition made by the AO to the extent it related to the profit of SJMI attributable to the Indian PE. However, the addition to the extent it related to the profits attributable to the direct sales made in India by SJMHK was confirmed.

The Tribunal held that, even if any amount is to be taxed in the hands of SJMI (the Taxpayer) by virtue of having a PE in India or otherwise, the amount that can be taxed is Rs. Nil, as the PE has been compensated at arm's length and has offered the said compensation for tax in India. Hence, Appeal filed by the tax payer is partly allowed. Case referred DIT vs. Morgan Stanley & Co. 2007-TII-01-SC-TP

St. Jude Medical Inc vs. ADIT; 2015-TII-136--ITAT-MUM –INT

CENTRAL EXCISE

Caselaws

Cash Discount allowed as deduction for arriving at the transaction value

The Taxpayer is engaged in the manufacture of excisable goods, namely Filter Elements, Inserts, and Cartridges and Components. These goods to various vehicle manufacturers or stock transferred to depots from where they are further stock transferred to clearing and forwarding agents. On Stock transfers, the Taxpayer claimed deduction towards Sales Tax, Cash Discount and Volume Discount on excise duty payable to arrive at the assessable value under Section 4 of the Central Excise and Salt Act, 1944.

Department rejected the cash discount claim on the ground that post 2000, with the introduction of transaction value, the price actually paid would be relevant and if the price paid is not the discounted price then the transaction value cannot include the cash discount.

The Hon'ble SC held that even under the amended Section 4, cash discount is available for deduction and that the basis of "transaction value" is the agreed contractual price and, accordingly, where the cash discount is known at or prior to the clearance of the goods would be allowed as deduction to arrive at the transaction value for levy of excise duty.

M/s Purolator India Ltd vs. Commissioner of Central Excise, Delhi-III; 2015-TIOL-193-SC-CX

Invalidation of advance license enabling the supplier to avail duty drawback benefit from DGFT amounts to indirect flow of additional consideration

The Taxpayer is engaged in the manufacture of polyester chips, polyester staple fibre, polyester filament yarn and other goods. The Taxpayer cleared the goods to advance licence holders at a price lower than the price charged to other buyers. The lower price was on account of advance license holders invalidating their license for import of goods thereby allowing the Taxpayer to act as intermediate domestic supplier of the said goods. This would also result in Taxpayer availing the benefit of duty drawback from the DGFT.

The Department was of the view that the benefit of duty drawback obtained by the Taxpayer from the DGFT amounted to indirect flow of additional consideration from the advance license holder and, therefore, the value thereof should be added for arriving at the transaction value.

The SC following an earlier decision in the case of Commissioner of Central Excise, Bhubaneswar - II v. IFGL Refractories Ltd. (2005) 6 SCC 713 held that the Taxpayer could get the duty drawback when advance licence holder category of buyers got their advance licences invalidated thereby surrendering the benefits accrued under such advance licence and thus amounts to additional consideration and is to be, therefore, added to the value of goods as per Rule 6 of the Valuation Rules.

Commissioner of Central Excise, Nagpur-I vs. M/s Indorama Synthetics (I) Ltd; 2015-TIOL-190-SC-CX

In MRP valuation, the abatement specified by notification can alone be deducted to arrive at the assessable value

The Taxpayer is engaged in the manufacture of CTVs and had entered into an agreement with one M/s ELCOT (A Govt. of Tamil Nadu Enterprises) for supply of 14" CTVs. As per the contract between the parties, ELCOT had agreed to pay the warranty charges at the end of 1st year and 2nd year in equated amounts. The Taxpayer paid duty under Section 4A of the CEA. However, while computing the value, the Taxpayer claimed deduction of Rs.150 being amount of warranty charges which was not paid at the time of purchase by ELCOT. The Taxpayer claimed that since warranty being service, it had paid service tax on the said amount of Rs.150.

The Department rejected the above claim of deduction and held that duty is payable on MRP less prescribed abatement for CTVs.

The Tribunal held that CTVs are notified under Section 4A of the CEA and, therefore, to be valued on MRP less prescribed abatement. It was held that apart from the prescribed abatement no other deduction was permissible from the MRP and thus rejected the contention of the Taxpayer seeking deduction of warranty charges. Also repelling the contention that the Taxpayer had paid service tax on the warranty charges, it held that the statutory provision under Section 4A cannot be altered or influenced merely because the Taxpayer has chosen to discharge service tax on portion of the retail sale price.

Videocon Industries Ltd vs. CCE; 2015-TIOL-1801-CESTAT-MUM

Credit allowed even if Taxpayer is shown in the invoice as consignee and not as buyer

The Taxpayer availed Cenvat credit on the invoices wherein Taxpayer was the consignee and the name of the buyer was mentioned separately. The Department alleged that since the Taxpayer is not the buyer as per the invoices and they are not making payment of the said invoices to manufacturer supplier, therefore documents are invalid documents and credit is not admissible on such documents.

The Tribunal held that invoice is one of the documents prescribed documents under Rule 9(1) of CCR for taking credit. Further, it is not mandatory for the purpose of taking credit that the goods should be paid for by the Taxpayer and it is sufficient if it is established that input is duty paid, received in the factory and used in the manufacture of dutiable final products.

M/s Aplab Ltd vs. Commissioner of Central Excise, Mumbai; 2015-TIOL-1764-CESTAT-MUM

Credit allowed on supply of manpower for canteen, gardening and cleaning activities

The Taxpayer is engaged in manufacturing of excisable goods and availed credit various input services. The Department was of the view that the Taxpayer has wrongly availed credit of input services namely, Outdoor catering service, cleaning and Repair/maintenance service of Guest House, Gymnasium and sports club/sports ground etc.

The Tribunal observed that—

The Taxpayer is maintaining canteen within the factory premises as per statutory requirement u/s 46 of the Factories Act since there are about 1000 employees. The Taxpayer is availing services of an agency to supply required manpower/labour to enable them to run the canteen. As Service tax paid on Manpower supply is availed as credit by them and there is no Outdoor Catering service availed, there is no requirement of proportionate disallowance of credit. Accordingly, credit will be available.

Further the ST paid on Gardening expenses is fully allowable as credit since the said service is required for maintaining the good atmosphere in the manufacturing area and is also a condition precedent laid down by the State Pollution Control Board without which the Taxpayer cannot resort to manufacturing activity:

Further, cleaning expenses incurred for maintenance of residential colony which forms part of the factory premises as per the ground plan approved by the CE authorities. Since the colony is a small industrial township and is required to be maintained by the Industry itself, Credit will be allowed.

M/s Mukund Ltd. vs. Commissioner of Central Excise, Bellapur; 2015-TIOL-1693-CESTAT-MUM

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