The Associated Chambers of Commerce and Industry of by alicejenny


  Direct & Indirect Tax Developments

                  Nageswar Rao
                 December 16, 2010
Amarchand & Mangaldas & Suresh A. Shroff & Co.

   Few interesting developments in Corporate Tax

   Developments in the area of Sales Tax

   Developments in Cenvat and Service tax

                                                   Privileged & Confidential

Vodafone case update
  Brief Background:

     Vodafone purchases share in a overseas (Cayman Island) entity

     Issue relating to applicability of Indian withholding taxes being disputed since 2007

     Bombay High Court upheld Indian tax authorities jurisdiction to assess transaction in
     September 2010

     Currently under appeal to Supreme Court of India

     INR 2500 crores deposited pending resolution of the issue

     Next hearing scheduled for February 2011

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Maruti Suzuki’s case on Transfer Pricing

    Maruti Suzuki India is a subsidiary of Japanese entity (Suzuki)

    Manufacturing and selling of cars under license agreement with parent entity for provision
    of technical knowhow etc.

    Use of trade mark “Maruti Suzuki” on the products; claim by tax authorities that parent
    should compensate the Indian subsidiary as increase in “Suzuki” brand popularity in India
    benefits the parent entity

    Delhi High Court’s decision laying down general guidelines on transfer pricing of
    marketing intangibles contested before Supreme Court

    Supreme Court directs it back to the TPO for fresh consideration

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Tribunal on Transfer Pricing

   Recent Tribunal decisions on few recurring issues relating to Transfer pricing arena:
      Hoechst - Indian government’s price regulations to be considered while determining
      Skoda India - Adjustments based on reasonable assumptions to be made for
       comparable’s data
      Abhishek Auto Industries - transfer pricing adjustment can be made only to the
       international transactions and not transactions at the enterprise level which include
       domestic transactions
      Logix Micro Systems Ltd –imputation of interest on inter-company receivables as
       part of the transfer pricing assessment scrutiny upheld
      Nimbus Communications Ltd - levying interest on outstanding trade balances is
       different from interest charged on loans and cannot be compared
      SAP Labs India Private Limited -foreign exchange gain can be included as part of
       the sale proceeds of the taxpayer and rejected abnormally high profit companies as

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Permanent Establishment

   Seagate Singapore International Headquarters Pvt. Td., (AAR); A customs bonded warehouse
   operated by a independent service provider ( remunerated at arms length) to store and deliver just-in
   time to buyers (OEM’s) in India of Hard disc drives belonging to the Singapore based entity results in a
   PE ; the demarcated space in the warehouse constitutes fixed place PE
   Airlines Rotables Ltd ( Mumbai ITAT); An UK entity stored spares and components in the premises &
   disposal of Indian customer with whom they had a contract for repairs and overhauling of aircraft
   components outside India: this does not result in a PE as stocking in this case was at a premises over
   which the overseas entity did not have control
   eFunds Corporation ( Delhi ITAT); Back to back assignment of customer contracts for ITES & provision
   of assets by overseas entity to and Indian subsidiary       leads to Permanent establishment of the
   overseas entity and taxation in India
   Tekmark Global Solutions LLC ( Mumbai ITAT); Deputation of personnel by US entity entity resulting
   in the individuals working under the super visions and control of the Indian entity does not result in a PE
   of the US entity
   Valentine Maritime ( Mauritius ) Ltd ( Mumbai ITAT); Three different contracts executed in India for
   less than the threshold time limit in each case , could not be aggregated to find a PE if there is no specific
   provision for aggregation in the particular DTAA

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Controversy relating to software continues

    Microsoft decision ( Delhi ITAT) :
       Microsoft products sold in India through distributors through chain of overseas entities
       Indian customer having to sign an end user license with the overseas entity and obtain activation
       OECD commentary not relevant
       Transaction results in royalty payment and it is a license for use of copyrighted article and not sale

    Reliance decision ( Mumbai ITAT):
       Software licensed by US entity for Webhosting and ASP services with restrictions on
                                    - use of software on behalf of third party
                                    - access to agreed persons only
                                    - modifying, reversing, decrypting of source code of algorithms
                                    -right to use, making of copies
       Relying on OECD commentary and in the context of above facts the tribunal ruled that it is a
        purchase of copyrighted article and therefore does not involve royalty

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Thin Capitalisation Regulations

  Besix Kier Dabhol, SA (Mumbai ITAT)

     Disallowance of interest paid to overseas shareholders (60% Belgian & 40% UK) by a
     Belgian entity’s project office PE in India without routing it through the Head office at

     PE had capital of INR 38 lacs and debt of INR 9410 lacs (1: 248 ratio)

     Assessing Officer Relying on Article 7(3)(b) disallowed interest as payment to HO & debt
     re-characterized as equity resulting in interest deduction being disallowed

     Taxpayer contended the borrowing was from shareholders and not from HO and India
     does not have any Thin Capitalization Rules as in other countries ( incl. Belgium)

     Tribunal upheld the contention of the taxpayer

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Other interesting Corporate Tax Developments

   The number of Indian court decisions on international tax topics being recognized by the
   Global tax community both in terms of numbers and quality of the decisions

   First year of Dispute Resolution Panel (DRP) not encouraging, defective design of this
   dispute resolution mechanism being cited as the cause

   Mutual Agreement Procedure (MAP) as an alternate dispute resolution mechanism
   gaining popularity

   Advance pricing arrangements being awaited with great expectations; experience of other
   countries; issues with unilateral agreements, costs, confidentiality

   Other countries moving ahead with mandatory/ discretionary arbitration clauses in DTAA’s
   to strengthen alternative dispute resolution process

   Exchange of information clause in DTAA and its use between tax authorities of different

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                       Privileged & Confidential

A and G Projects and Technologies Ltd. v. State of
Karnataka, 2008 (16) SCALE 178
     Registered dealer both under the Karnataka Sales Tax Act, 1957 and the Central Sales
     Tax Act, 1956 ("CST ACT 1956", for short) was awarded three independent contracts in
     Project subcontracted to M/s. Bay West Power and Energy Pvt. Ltd. ("M/s. Bay West", for
     short) located outside the State of Karnataka for procuring the capacitor banks
     ("equipment", for short)
     The first contract the appellant ->KPTCL for supply of the equipment: second contract
     appellant -> M/s. Bay West ;third contract M/s. Bay West -> local manufacturers in Tamil

  Limited issue before the Court:

     i) Whether the appellant could have been taxed by the Karnataka Government by invoking
     the proviso to Section 9(1) of the CST ACT 1956?
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Observations of the Court

     As per Section 9(1)
           on inter-State sales    tax shall be levied by G.O.I. and collected by the State
             Government from which the movement of goods commenced
           the proviso to this section states; In case of second and subsequent sales made
             during the inter state movement of goods tax will be collected by state government
             from which concessional forms are received by the registered dealer
     Broadly , sale occasioning inter- state movement are covered under u/s. 3(a) & sales
     effected during the interstate movement of goods covered u/s. 3(b)

     Proviso to Section 9(1) of the CST ACT 1956 is not applicable to the facts of the case as
     the AO has categorically held that all the three sales fell under Section 3(a) ( sales
     occasioning interstate movement)

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A and G Projects and Technologies Ltd. v. State of
Karnataka, 2008 (16) SCALE 178                                                            (Contd…)

  Circulars by State Department of Commercial taxes, West Bengal and Andhra Pradesh

     In relation to the issue raised in this case, it is important to refer to Trade Circular No.
     11/2010, dated 04.10.2010 passed by the Department of Commercial Tax, West Bengal
     and Circular No. CCT’s Ref. AIII(2) 91/2010, dated 07.05.2010 passed by the Department
     of Commercial Tax, Andhra Pradesh, wherein it has been stated that pre-determined sales
     would still qualify for exemption under the in-transit sales concept, subject to appropriate

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State of Karnataka v. Azad Coach Builders (P.) Ltd.
[2010] 4 GST 72 SC

     Tax payer in business of building bus bodies on the chassis supplied by the exporter

     Manufacturer of bus bodies claimed exemption under section 5 (3) on the sale of bus
     bodies as penultimate sale in the course of export made to the exporter

     Final Export from India of complete bus bodies by another entity to Sri Lanka

     The assessing authority rejected exemption claim of Assessee treating the transactions
     as inter-state sales on the ground that the ‘bus bodies’ and ‘buses’ were two different
     commodities and the bus bodies as such, were not exported

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Observations of the Court:

    To constitute a sale in the course of export, there must be an intention on the part of both the
    buyer and the seller to export , an obligation to export, & there must be an actual export
    The obligation may arise by reason of statute, contract between the parties, or from mutual
    understanding or agreement between them, or even from the nature of the transaction which
    links the sale to export
    To occasion export, there must exist such a bond between the contract of sale and the actual
    exportation, that    each link is inextricably connected with the one immediately preceding it,
    without which a transaction of sale cannot be called a sale in the course of export of goods out
    of the territory of India
    Noting that bus bodies constructed and manufactured by the assessee could not be of any use
    in the local market, but were specifically manufactured to suit the specifications and requirements
    of the foreign buyer
    When the transaction between the assessee and the exporter and the transaction between the
    exporter and the foreign buyer were inextricably connected with each other, the ‘same goods’
    theory had no application
    The assessee was entitled to exemption under section 5(3) as claimed
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                         Privileged & Confidential

Maruti Suzuki Limited v. Commissioner of Central Excise,
(2009) 9 SCC 193

     Maruti Suzuki Ltd. (appellant) is engaged in the business of manufacturing motor vehicles
     Maruti had installed three gas turbines in their factory for generation of electricity
     Maruti also uses diesel generating set (DG set) for generation of electricity with the use of diesel for
     which they had not availed any credit
     In their factory, Maruti has a common distribution point for electricity generated in turbines as well as DG
     set and the entire electricity which is generated in the turbines and DG set(s), placed in the factory, is
     distributed through common distribution point
     During the disputed period Maruti cleared a part of electricity generated in the factory to its joint
     ventures, vendors etc. It may be noted that even the joint ventures, vendors etc. to whom excess
     electricity is wheeled out in turn manufacture final products

  Issue before the Court:
     Whether an assessee would be entitled to claim Cenvat credit in cases where it sells electricity outside
     the factory to the joint ventures, vendors or gives it to the grid for distribution

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Observations of the Court

   The definition of the word "input" can be divided into three parts, namely:

     specific part
     inclusive part
     place of use

   All the three parts are required to be satisfied before an input becomes an eligible input
   It is necessary to determine whether the process of manufacture and the use of the goods are integrally
   To the extent the excess electricity is cleared to the grid for distribution or to the joint ventures, vendors,
   and that too for a price (sale) the "process and the use test" fails
   In such a case, the nexus between the process and the use gets disconnected
   In such a case, it cannot be said that electricity generated is "used in or in relation to the manufacture of
   final product, within the factory
   Therefore, to the extent of the clearance of excess electricity outside the factory to the joint ventures,
   vendors, grid etc. Cenvat credit was denied

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Ramalal Sahkari Chini Mills Ltd, UP v. Commissioner of
Central Excise, Meerut-I, 2010-TIOL-102-SC-CX


     The appellant engaged in the manufacture of V.P. sugar and molasses, availed of credit of
     the duty paid on welding electrodes

     Three show cause notices were issued to the assessee proposing to recover the wrongly
     availed credit amount

     The Assistant Commissioner, confirmed the demand along with interest and penalty

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Observations of the Court

   The effect of the Maruti Suzuki Limited (supra) is that in order to fall within the ambit of the term
   "inputs" within the meaning of Rule 2(g) of the Cenvat Credit 2002 Rules, the goods must be :

     (i) used in or in relation to the manufacture of the final product, whether directly or indirectly,
     (ii) covered within the six categories of goods enumerated in Rule 2(g); and
     (iii) used within the factory of production

   Confining the goods only to the inclusive part of the definition that is to the six categories of
   goods mentioned therein may fall foul of the definition of the word "inputs" in Rule 2(g)
   Prima facie, it seems that the legislature did not intend to restrict the definition of "inputs" to only
   those six categories
   Therefore, the interpretation of the term “input” in Maruti Suzuki Limited, may require
   reconsideration by a larger bench

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Infotech Software Dealers Association v. Union Of India,

     Infotech Software Dealers Association (“ISODA”)is a society registered under the
     Societies Registration Act
     It is engaged in the business of reselling of computer software products falling under 3
     categories – (i) Shrink Wrap Software; (ii) Multiple User Software/Paper License and (iii)
     Internet Download
     The ISODA filed the subject petitions under Article 226 of the Constitution of India, praying
     for the issue of a Writ of Declaration to declare Section 65(105)(zzzze) of Chapter V of
     Finance Act, 1994 (“the Finance Act”) in relation to the business activities of the members
     of the Petitioner as:
            A. Null and void;
            B. Ultra vires and unconstitutional of the provisions of Article 245, Entries 92C and
               97 of List-I, Entry 54 of List-II of Schedule VII of the Constitution of India; and
            C. Contrary to provisions of Articles 14, 19(1)(g), 265 and 268A of the Constitution
               of India
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Issues before the Court:

    The writ petitions raised the following three questions:

       Whether software is ‘goods’

       Whether supply of software pursuant to the End User License Agreement is to be
        treated as “sale or service’

       Whether the Parliament has the legislative competency to levy Service Tax on
        Information Technology Software Services

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Observations of the Court

   Software is 'goods' as defined in Article 366(12) of the Constitution of India

   The Parliament has the legislative competency to bring in enactments to include certain
   services provided or to be provided in terms of Information Technology Software for use in
   the course or furtherance of business or commerce to mean a taxable service, in terms of
   the residuary Entry 97 of List I of Schedule VII

   The challenge to the amended provision cannot be accepted so long as the residuary
   power is available. The question as to whether a transaction would amount to sale or
   service depends upon the individual transaction and on that ground, the vires of a
   provision cannot be questioned

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M/s Shubh Timb Steels Limited v Union of India and
another, CWP No. 11597 of 2010 (O&M)


     Petitioner has let out the said property at Parwanoo, District Solan in the State of
     Himachal Pradesh to business entities. It is receiving rent @ Rs.1,75,000/- per month as
     per the agreement

     The petitioner contended that the subject matter of property and leasing are covered by
     field assigned to State legislature and, thus, outside the purview of the Central Legislature

     The Union of India replied stating that renting of property was different from sale of goods
     or transfer of property or conveyance. The levy was not covered under Entry 18 and Entry
     45 nor by Entry 49 which contemplated direct tax

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M/s Shubh Timb Steels Limited v Union of India and
another, CWP No. 11597 of 2010 (O&M)                                                        (Contd.)

  Issue before the Court:

     Whether levy of service tax on providing of service to any person by any other person by
     renting of immovable property for business was covered by Entry 49 List II exclusively and
     not covered by Entry 92C or 97 of List I and thus, was outside the purview of the Central
     Legislature. Further question is as to validity of levy being made retrospectively operative
     from 1.6.2007

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Observations by the Court

   Service Tax is a destination based consumption tax being not a charge on business but on
   consumer and is leviable on service provided. It is, thus, value added tax. The services
   may be ‘property based’ or ‘performance based’
   Renting of property for commercial purposes is certainly a service and has value for the
   service receiver
   The aspect of service element in renting transaction is certainly an independent aspect
   covered under Entry 92C read with Entry 97 of List I. In any case, subject matter of
   impugned levy being outside the scope of entry 49 of List II, power of Union Legislature is
   Question whether levy will be harsh being in addition to income tax and property tax is not
   a matter for this Court once there is legislative competence for the levy
   Even if it is held that transaction of transfer of right in immovable property did not involve
   value addition, the provision cannot be held to be void in absence of encroachment on List

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Association of Leasing Financial Service Companies v Union
of India and Others 2010-TIOL-87-SC-ST-LB


     Appellant filed a writ petition under Article 226 of the Constitution before the High Court
     challenging the levy of service tax imposed by Section 65(12)(a)(i)of the Finance Act,
     1994 (as amended) - financial leasing services including equipment leasing and hire-

     The appellant challenged the amendment as ultra vires the legislative competence of the
     Parliament for the inclusion of hire-purchase and leasing services within the service tax

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Observations by the Court

    Merely because for valuation purposes inter alia "finance/ interest charges" are taken into
    account and merely because service tax is imposed on financial services with reference to
    "hiring/ interest" charges, the impugned tax does not cease to be service tax and nor does
    it become tax on hire- purchase/ leasing transactions under Article 366(29A) read with
    Entry 54, List II

    While State Legislature is competent to impose tax on "sale" by legislation relatable to
    Entry 54 of List II of Seventh Schedule, tax on the aspect of the "services", not being
    relatable to any entry in the State List, would be within the legislative competence of the
    Parliament under Article 248 read with Entry 97 of List I of Seventh Schedule to the

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                       Thank You

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