Introduction
We are pleased to present the latest edition of Tax Street – our newsletter that covers all the key developments and updates in the realm of taxation in India and across the globe for the month of August 2024.
- The 'Focus Point' covers the key pointers to consider when filing income tax returns.
- Under the 'From the Judiciary' section, we provide in brief, the key rulings on important cases, and our take on the same.
- Our 'Tax Talk' provides key updates on the important tax-related news from India and across the globe.
- Under 'Compliance Calendar', we list down the important due dates with regard to direct tax, transfer pricing and indirect tax in the month.
We hope you find our newsletter useful and we look forward to your feedback.
You can write to us at taxstreet@nexdigm.com. We would be happy to hear your thoughts on what more can we include in our newsletter and incorporate your feedback in our future editions.
Focus Point
Overview of crucial aspects when filing income tax returns
The assessees are required to file their income tax returns, offering their income earned during the year to tax. The provisions of Income-tax Act (ITA),1961 state that income earned in the previous financial year (PY) is liable to be taxed in the assessment year. The Income Tax Return (ITR) is to be filed within the due date prescribed under Section 139(1) of the ITA. The due date of filing the return of income is approaching. The process of filing an ITR can be a bit complex and challenging, and should be carried out with accuracy.
Below is a list of things that taxpayers should consider while filing their ITR:
Sunset clause not extended – Section 115BAB
Companies engaged in manufacturing are eligible to opt for the lower rate of tax under Section 115BAB provided they have commenced manufacturing by 31 March 2024. This option has to be exercised prior to filing the first return of the company. A company that has opted for the provision in previous years but has failed to commence manufacturing will be ineligible for the lower rate. Such a company may exercise the option to avail the lower rate under Section 115BAA.
Disallowance of delayed payments made to MSEs
This provision is effective from AY 2024-25. The Finance Act, 2023 inserted Section 43B(h), which stipulates that any sum owed to Micro and Small enterprises will be allowed as a deduction only if the payment has been made within the due date stipulated by the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006. Alternatively, the payment will be allowed in the year in which the payment has been actually made. Furthermore, the extended timeline up to the due date of ITR filing, provided under section 43B of the ITA, is not applicable for delayed MSE payments.
As per Section 15 of MSMED Act, a buyer is liable to make payment to the supplier within a period of 15 days in absence of an agreed period or a maximum period of 45 days if the period has been agreed upon.
Employee contribution to funds - Section 36(1)(va)
An employer is mandated to contribute funds collected from an employee for PF or other welfare funds within prescribed due dates as per relevant laws. Any delayed contribution is not allowed as a deduction.
The Hon'ble SC in a recent decision1 has ruled in favor of Revenue and held that the employees contribution paid beyond due dates shall not be allowed as a deduction as per the provisions of Section 36(1)(va) of the ITA and the provisions of Section 43B of the ITA do not apply.
Prior to this ruling by the SC, deductibility of employee's contribution to provident fund collected by the employer and deposited beyond the due date specified in the relevant statutes but before the filing of the return of income, had been a matter of litigation resulting from contrary decisions of various High Courts.
Given the contrary rulings on the issue, an explanation was introduced to Section 36(1)(va), clarifying that the due date for depositing the contribution collected by the employer shall not be or never has been the due date mentioned in Section 43B of the ITA. The amendment is effective from 1 April 2021.
Relaxation from Section 40(a)(i)/ (ia) - Non Deduction of TDS (Form 26A)
If tax is required to be deducted at source of any payment and such payment is made without deducting tax at source, then such expense or proportionate expense is not allowed as a deduction while computing taxable income. The expense is allowed as a deduction in the year in which tax is paid to the Government. This often leads to a cashflow issue for the company, as the payment to the recipient has already been made and now to claim a deduction of the expense, the tax would either need to be borne by the payer or a separate recovery of tax payable would be required from the recipient.
A provison in the said section was inserted a few years ago, suggesting that if the recipient has paid the tax, it shall be deemed that the tax has been paid on the date the recipient has furnished his return of income; and deduction of the expense shall be allowed to the payer in the year in which the recipient files the return. The payer is required to obtain and file Form 26A duly signed by a CA.
Some relevant tax deductions
Deduction for generation of additional employment (Section 80JJAA):
An employer who is subject to tax audit under Section 44AB of the ITA is allowed additional deduction of cost of salaries from taxable income for creating new jobs. If an employer has increased the number of people employed with him, he can be eligible for a deduction of the additional salary cost over a period of three years, i.e., 30% per year. The deduction is subject to the fulfillment of conditions specified in the section, including that the salary cost of each eligible new employee should not exceed INR 25,000 per month. Additionally, a CA report in Form 10DA is to be filed one month before the due date under Section 139(1).
Deduction under Section 80M:
A domestic company distributing dividends can claim a deduction under this section if its gross total income includes dividends from other domestic or foreign companies, or business trusts. The deductible amount is the lower of the dividends received or the dividends distributed by the company by the due date. Due date here is defined to mean the date one month prior to the income return filing due date under Section 139(1).
Form 71 to Allow TDS Credit in Respect of Income Disclosed in ITR Filed in Earlier Years
TDS credit can be claimed by any assessee only in the year in which the corresponding income is offered to tax. It has been observed that assessees face difficulty in claiming the TDS credit against the income offered to tax due to the difference in timing of TDS and income reporting.
- Where the TDS has been deducted in Year 1, but the income is offered to tax in Year 2 - In such cases, the assessee can simply carry forward the TDS credit to the subsequent year by making relevant disclosures in the ITR.
- Where the income has been offered in Year 1 but the TDS is deducted in the subsequent year, i.e., in Year 2.- This causes a TDS mismatch, as the income has already been taxed on an accrual basis in Year 1, but the tax is deducted in the subsequent year.
A procedure to address the second issue has now been provided in Section 155(20) of the ITA. The assessees need to file Form 712 within two years from the end of the FY in which the tax was withheld. The Assessing Officer (AO) shall thereafter rectify the return of income under Section 154 of the ITA.
From the Judiciary
Direct Tax
Can a financial institution which is wholly owned by the Government of China (36.45% shares held by the Government of China) take benefit of the Article 11(3) of the IndiaChina Double Taxation Avoidance Agreement (DTAA)?
Tata Teleservices Ltd TS-603-ITAT2024(DEL)
Facts
Tata Teleservices Ltd. (Assessee) did not deduct tax at source on interest payments made to China Development Bank (CDB) by taking benefits of Article 11(3) of the DTAA. However, tax officer opposed it and made two arguments:
Ownership Dispute: The Revenue contends that, according to the financial statements, only 36.45% of CDB's shares were held by the Ministry of Finance, China and the remaining shares held by other entities such as Central Huijin Investment Ltd., Buttonwood Investment Holding Company, and the National Council for Social Security Fund. Thus, the Revenue argued that CDB does not meet the criteria for exemption as a wholly government-owned financial institution.
Amendment Dispute: The Revenue also challenges the applicability of the amended Article 11(3) of the DTAA, effective from 17 July 2019, which specifically includes CDB in the list of institutions wholly owned by the Government of China. The Revenue argues that this amendment, which post-dates the relevant financial year (FY 2015-16 ), should not retroactively apply to the case.
Held
The Delhi Income Tax Appellate Tribunal (Delhi ITAT) concluded that the assessee is entitled to the benefits under Article 11(3) of the India-China DTAA, which exempts interest payments made to CDB from tax in India based on the following aspects:
- Protocol Clarification: The 2019 protocol to the DTAA clarified that CDB is a financial institution wholly owned by the Government of China, which aligns with the definition provided under Article 11(3) of the DTAA.
- Tax Exemption Confirmation: Interest payments made by the assessee to CDB are exempt from tax in India based on the DTAA provisions.
- Revenue's Appeal Dismissed: The Revenue's appeal challenging the exemption of CDB was dismissed, upholding the CIT(A)'s favorable decision for the assessee.
Our Comments
The case underscores the importance of Article 11(3) of the DTAA, which exempts interest payments to government-owned financial institutions from tax. By affirming that the CBD is covered under this provision as a wholly government-owned institution, the ruling emphasizes the DTAA's effectiveness in providing clarity and certainty in international tax matters, thereby protecting taxpayers from undue tax liabilities and disputes.
Whether payments for accessing online educational content should be considered as income from providing technical services and thus subject to tax?
Coursera Inc. TS-610-ITAT-2024(DEL)
Facts
Coursera Inc., a USA-based company operating a global online learning platform, was involved in a tax dispute with Indian authorities over the tax treatment of its receipts from Indian customers. Coursera offers access to courses and degrees from various universities and companies through its platform but does not create the content itself. Instead, it acts as an intermediary, providing access to these courses for a fee.
The Indian tax authorities contended that Coursera's receipts should be classified as Fees for Technical Services (FTS) or Fees for Included Services (FIS) under the tax treaty between India and the US. The authorities argued that Coursera provides technical services, including user-specific services and support, which they claimed involved the transfer of technical knowledge.
Held
The Delhi Income Tax Appellate Tribunal (Delhi ITAT) ruled that Coursera is a aggregator of educational content, not a provider of technical services. Therefore, its receipts from Indian customers do not qualify as FTS or FIS under the tax treaty.
The Delhi ITAT noted that the Assessing Officer (AO) failed to properly review the agreement between Coursera Inc. and Gandhi Institute of Technology and Management, leading to an incorrect conclusion.
The services provided by Coursera did not involve the transfer of technical knowledge or skills, and thus did not meet the 'make available' condition under Article 12(4) of the India-USA DTAA.
The Revenue could not prove that Coursera's services involved transferring technical knowledge that would enable the recipient to use it independently and therefore, the Revenue's appeal was dismissed.
Our Comments
This case highlights the difference between just providing a platform for services and offering technical services as defined under Article 12(4) of the India-USA DTAA.
Transfer Pricing
Dismisses assessee's miscellaneous application for rectifying earlier order with respect to interest on receivables
BA Continum India Private Limited [TS-339-ITAT-2024(HYD)-TP]
Facts of the case
The assessee filed a Miscellaneous Application (MA) for rectification/ amendment of the Tribunal's order for AY 2018-19. The Ld Assessee Representative (AR) submitted that the direction given by the Tribunal in Para 9 of the order is required to be modified, as powers of the Transfer Pricing Officer (TPO) pursuant to the direction of the Tribunal cannot be restricted. Furthermore , it was the contention of the Ld AR that ground numbers 2(a) and 2(d) have not been adjudicated by the Tribunal.
In the case, the Dispute Resolution Panel (DRP) had decided the issue with respect to interest on receivable in Paras 2.1.17 to 2.1.21 of its order whereby the DRP has held that the SBI short-term rate as applicable for outstanding receivables beyond credit period of 30 days is to be applied. However, the Tribunal, while remanding the matter to the file of the TPO had directed to decide the issues considering the decision in the case of Zeta Interactive, Satyam Venture, and Apache Footware.
ITAT order
The Tribunal held that it has merely remanded the issue to the file of the TPO with the direction to consider various judgments of the Tribunal and in that view, there is no error in the order passed by the Tribunal. Furthermore, the Tribunal noted that the assessee had relied upon the HC's decision in the case of Laxman Das Bhatia Hingwala (P) Ltd. to buttress that the Tribunal has the power to rectify its order. The Tribunal held that once the issue has been settled by the Hon'ble Supreme Court whereby the power of the Tribunal has been interpreted in the manner mentioned in the case of Reliance Telecommunication then this judgment of the Hon'ble Delhi High Court has no significance and relevance.
In connection with grounds not adjudicated by the Tribunal, it held that these grounds were not raised specifically by the assessee during the course of the hearing and accordingly, there was no occasion to decide the issue.
Our Comments
During assessment proceedings before ITAT or any other tax authority, it is important that all the grounds are specifically raised/pressed for adjudication/discussion. Furthermore, the ITAT does not have the power to recall an order except where a mistake is apparent from the record, as held by the SC in the case of Reliance Telecom Ltd.
Confirms deletion of Section 271G penalty; notes no violation of Section 92D, follows earlier order
Laxmi Diamond Private Limited [TS342-ITAT-2024(Mum)-TP]
Facts of the case
The assessee, being the flagship entity of the group, is mainly engaged in a diamond business related to the manufacturing and training segment of diamond industries.
During the proceedings before the TPO, the assessee was unable to submit the documents as per the provisions of Section 92D(3) of the ITA read with rule 10(B)(1)(e) of the Income Tax Rules, 1962 (the rule). The Ld AO initiated the penalty proceedings under Section 271G and finally, the penalty was levied at 2% of the total value of relevant international transactions.
The aggrieved assessee filed an appeal before the Ld CIT(A). The Ld CIT(A), considering the asessee's submission, deleted the penalty and allowed the assessee's appeal.
Aggrieved with the appeal order, the Revenue filed an appeal before the ITAT.
Revenue's contention before ITAT
The Revenue argued that the CIT(A) erred in deleting the penalty under Section 271G by holding that the assessee had made substantial compliance, failing to note that under TNMM adopted by the assessee, the profit, including segmental account of the international transaction had to be furnished as asked for, whereas the assessee had only furnished the entity level margin.
Held by ITAT
The ITAT dismissed the appeal of the Revenue basis the facts and circumstances of levy of penalty under Section 271G for AY 2011-12 being identical to that for AY 2012- 13. In the order for AY 2011-12, the ITAT observed that keeping in view of the nature of the diamond business in which the assessee is engaged, it has substantially complied with the requirement of filing documents with respect to segmental amount relating to transactions with AE and non-AEs for determination of ALP of international transaction. Furthermore, the ITAT relied on the observation of CIT(A), wherein it observed that since there is no adjustment made in the arm's length price, the penalty so imposed is not justified. In doing so, CIT(A) also relied on various judicial pronouncements having similar facts, wherein penalty has been deleted under Section 271G of the ITA, when no adjustment in arm's length price was made.
Our Comments
The ITAT upheld the decision of CIT(A), which highlights that when the TPO makes no TP addition after perusal of TP study report, then the penalty levied under Section 271G for non-submission of documents under Section 92D is not sustainable.
Indirect Tax
Mineral Area Development Authority & Anr. vs Steel Authority of India & Anr. [TS-287-SC-2024- NT] and [TS-318-SC-2024-NT] Whether Royalty in respect of mineral rights payable under the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) is in the nature of 'tax', and whether the State legislatures lack the competence to levy tax on such mineral rights?
Note: Regulation of mines and mineral development is enumerated under both the Union List (Entry 54 of List I) and the State List (Entry 23 of List II) of the Seventh Schedule to the Constitution. The entrustment of the subject to the State legislatures under Entry 23 of List II is subject to the provisions of Entry 54 of List I.
Furthermore, Entry 50 of List II pertains to "taxes on mineral rights subject to any limitations imposed by the Parliament by law relating to mineral development."
On the other hand, Entry 49 of List II empowers States to levy taxes on land and buildings.
Footnotes
1. Checkmate Services Private Ltd. Vs CIT – I [2022] 143 taxmann.com 178 (SC)[12-10-2022]
2. Rule 134 of the Income Tax Rules
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