Offshore distribution commission earned by a foreign company for distributing Indian mutual funds outside India not taxable in India.
The Income Tax Appellate Tribunal, Mumbai (ITAT), a quasi- judicial authority to hear appeals against the decisions of income tax authorities, in the case of Deputy Commissioner of Income Tax v. Credit Suisse (Singapore) Ltd.1 (taxpayer), held that the offshore distribution commission income earned by the taxpayer for distributing Indian mutual fund schemes of an Indian mutual fund to investors outside India is not attributable to any operation carried out in India and hence not taxable in India.
The taxpayer, a company incorporated in Singapore and a tax resident of Singapore, was registered as a foreign institutional investor (FII) with the Securities and Exchange Board of India (SEBI). The taxpayer and HDFC Asset Management Co. Ltd., an India mutual fund (HDFC), entered into an offshore distribution agreement (Agreement) providing for the taxpayer to distribute and promote HDFC's mutual fund schemes to investors outside India and to procure subscription for such schemes.
In the income tax returns (ITR) filed by the taxpayer for the assessment years 2014-15 and 2015-16, the taxpayer claimed exemption from tax in India for the offshore distribution commission income received under the Agreement on the ground that it does not fall under Article 12(4) of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore because of not fulfilling the 'make available' test. The taxpayer also submitted that even if the income was to be regarded as 'business income' it would still not be taxable in India by virtue of Article 7 of the DTAA in the absence of taxpayer having a permanent establishment (PE) in India.
The assessing officer (AO), rejecting the taxpayer's submissions, held that the income earned by the taxpayer would be taxable under Article 23 (income not expressly mentioned) of the DTAA read with Section 5(2) of the Income Tax Act, 1961 (IT Act) by virtue of it being a distributor of HDFC, an Indian fund, which is controlled and regulated by SEBI and Reserve Bank of India. Therefore, per AO, location, control and management of HDFC was situated in India which constituted taxpayer's business connection in India and created a sufficient nexus of income with India.
The Commissioner of Income Tax (CIT), rejecting the AO's order, held that the income earned by the taxpayer would be 'business income' in absence of the taxpayer having a PE in India and hence not taxable in India under Article 7 of the DTAA.
For reaching its decision, the ITAT took note that the taxpayer: (a) was a non-resident under the IT Act and a tax resident of Singapore; (b) earned offshore distribution income by promoting and distributing mutual fund schemes of HDFC to investors outside India; and (c) did not carry out any operations in India for earning the offshore income.
The ITAT upheld the CIT's order and observed that: (i) for treating offshore income as deemed to accrue or arise in India under Section 5(2) of the IT Act, such income must be 'reasonably attributable' to the operations carried out in India; and (ii) as all operations of the taxpayer for earning the offshore income were carried out outside India, the income earned by the taxpayer could not be held to be reasonably attributable to any operations carried out in India and hence not taxable in India.
A non-resident/foreigner (NR) to furnish Form ioF under the IT Act electronically
The IT Act requires a NR, wishing to claim any relief under the DTAA applicable to the NR, to provide a tax residency certificate (TRC) from the country of its residency to the Indian income tax authorities (IT Authorities) and additional information relating to NR in Form ioF, if such information is not already provided in TRC. Form ioF could be provided in physical form or electronically.
The Central Board of Direct Taxes, the statutory authority responsible for tax administration, by its Notification No. 03/2022 dated July 16, 20222 (Notification), has now made it mandatory for Form ioF to be provided electronically. To furnish Form ioF electronically, a NR would need to, as a first step, register on the e-filing portal maintained by the IT Authorities. The registration would require the NR to provide an income tax Permanent Account Number (PAN) (i.e., a number issued by the IT Authorities). This was not necessary if Form ioF could be submitted in physical form, as was the case earlier. In other words, compliance with the aforesaid requirement introduced by the Notification would require a NR to obtain a PAN even in a situation where the NR may not have been required to obtain a PAN by the IT Act. In effect, the Notification seems to indirectly override the exemption granted by Section 2o6AA and Rule 37BC of the IT Act from obtaining PAN. While this introduces an additional compliance for the NR, it will need to be seen whether, given the aforesaid, the IT Authorities will issue a clarification in this regard.
No statutory obligation on Government authorities to provide correct HSN or goods and service tax (GST) rate for the goods procured
The Supreme Court (SC), in the case of Union of India (UOI) v. Bharat Forge Ltd. & Another , ordered that the Government or state authorities issuing tenders for procurement of goods are not under any statutory obligation to provide the correct HSN or GST rate for the goods sought to be procured. While quashing the writ of mandamus issued by the Allahabad High Court (HC), the SC observed that in cases where the tax liability is on the supplier, it is the supplier's responsibility to find out correct classification and HSN code and the applicable GST rate.
The SC further directed that in all such cases, the tender issuing authorities should inform the jurisdictional officers of the bid winners about the details of the bid along with classification and GST rate adopted by the bid winner.
Goods lying with customs cannot be considered as assets of corporate debtor (CD)
The SC, in the case of Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs (CBIC)4, held that the abandoned imported goods lying in the customs warehouses for several years, cannot be considered a part of the CD's assets, where the company is already under moratorium being imposed during proceedings under Insolvency and Bankruptcy Code, 2016 (IBC).
The SC further held that IBC would prevail over the Customs Act, 1962 and the CBIC only has a limited jurisdiction to ascertain the quantum of custom duty and other levies and cannot initiate recovery by means of sale/confiscation in such cases.
Supply of goods and services in independent nature under a contract cannot be considered as a 'composite supply'
The Authority for Advance Ruling (AAR) in the matter of Hyundai Rotem Company5 held that the supply of goods and services by various cost centres of the applicant to Delhi Metro Rail Corporation Ltd. (DMRC) relating to design, manufacture, supply, testing, commissioning, and training of Standard Gauge Cars (Passenger rolling stock) in a phased manner will be considered as 'independent supplies' and not 'composite supply'.
The AAR examined the contract entered between the parties and observed that since there is only one contract, the scope of work under each cost centre is specified and identifiable which clearly makes each supply independent of each other and not naturally bundled in the ordinary course of business.
Right to appeal does lie with a person who opts for provisional release of goods and vehicle
The Kerala HC, in the case of Hindustan Steel and Cement v. Assistant State Tax Officer , while interpreting Section 129 of the Central Goods & Service Act, 2017 (CGST Act) held that a person who opts to make payment for the provisional release of goods and vehicle under Section 129 of the CGST Act still has a right to appeal under Section 107 of the CGST Act. The HC observed that the fact the system does not generate a demand order or that the system does not contemplate the filing of an appeal without a demand does not mean that the intention of the legislature was different.
GST applicability on liquidated damages, compensation, and penalty arising out of breach of contract or other provisions of law
The CBIC, through Circular No. 178/10/2022-GST dated August 3, 2022, clarified the GST applicability on liquidated damages, compensation and penalty arising out of breach of contract or other provisions of law. The board clarified that liquidated damages cannot be said to be a consideration received for tolerating the breach or non-performance of contract. Such payments do not constitute consideration for a supply and are not taxable. Cheque dishonour fine, penalty imposed for violation of law and forfeiture of salary or recovery of bond amount is not a consideration for any service and therefore will not be taxable.
Guidelines on issuance of summons under GST law
The CBIC, through Instruction No. 03/2022-23 (GST-Investigation) dated August 17, 2022, has issued guidelines on the issuance of Summons under section 70 of the CGST Act. The field officers have been advised to exercise the power of issuance of summons judiciously and with due consideration. Summons may not be issued if information can be sought through a letter. Senior management officials such as CMD/ MD/ CEO/ CFO/ similar officers of any company or public sector undertakings (PSU) should not generally be issued summons in the first instance unless they are actively involved in the decision-making process.
Customs duty on display assembly of a cellular mobile phone
The CBIC through Circular No. 14/2022-Customs dated August 18, 2022 (Circular), has clarified that display assembly of a cellular mobile phone with merely a back support frame of metal/plastic will attract a Basic Customs Duty (BCD) rate of 10%. However, if the back support frame of metal/plastic is imported individually, the same will attract a BCD rate of 15%. The Circular also clarified that other items like the sim tray, antenna pin, speaker net, power key, slider switch, battery compartment, flexible printed circuits for volume, power, sensors, speakers, fingerprints, etc come fitted along with a display assembly with or without a back support frame of metal/plastic, the whole assembly will attract a BCD rate of 15%.
1 ITA Nos. 6098 and 7262/Mum/2099
3 2022 VIL 52 SC
4 Civil Appeal No. 7667 of 2021
5 2022 VIL 216 AAR
6 2022 VIL 547 KER
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.