Direct Tax Vista Your weekly Direct Tax recap Edn. 8 – 31st May 2022 By Vivek Jalan, Partner, Tax Connect Advisory Services LLP

 

 

1. Income Tax and GST conundrum on Warranties

Now a days, most manufacturing and project companies provide warranties related to the repairing, maintenance and replacement of goods sold which contractually bind the company to provide free supplies/replacements of spares and hence the liability in respect of warranty for instruments sold/placed should be provided in the year in which the instruments are sold/placed. Such expenses are contingent upon the receipt of claims in future.

 

In Income Tax it is important that the calculation of provisions is scientific and the assessee should be able to correlate the provisions of warranty with the claims made by the customers for defective goods in proportionate manner in this particular year. It was held in the case of SIEMENS HEALTHCARE DIAGNOSTICS LTD. Vs THE A.C.I.T. [2022-VIL-638-ITAT-AHM] that merely giving overall amount will not prove the case of the assessee that it is properly arrived at the particular amount for provisions for warranty in the present assessment year without giving any details of the method used by the assessee.

 

In GST too the reversal of ITC on warranty costs are sometimes contested by field formations invoking ‘Section 17(5)(h) - goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples‘; In this regard, CBIC FAQ on IT/ITES states as follows -

 

‘Question 20: What would be the tax liability on replacement of parts (no consideration is charged from a customer) under a warranty and whether the supplier is required to reverse the input tax credit?

Answer: As parts are provided to the customer without a consideration under warranty, no GST is chargeable on such replacement. The value of supply made earlier includes the charges to be incurred during the warranty period. Therefore, the supplier who has undertaken the warranty replacement is not required to reverse the input tax credit on the parts/components replaced.’

 

It is however important to depict from the Cost Sheet/ BOM that warranty was actually included in the price of actual sold goods.

 

2. CBDT allows mandatory personal hearing in Faceless Penalty Scheme; Other amendments also made to give effect to changes in Section 144B vide FA 2022

The Central Board of Direct Taxes (CBDT) has notified Faceless Penalty (Amendment) Scheme, 2022 amending the provisions of the Faceless Penalty Scheme 2021 with effect from 27-05-2022. The notification gives effect to the changes proposed in the Finance Act 2022 to section 144B of the Income Tax Act, as per the order. The move has come after various Courts had quashed Assessment Orders for not granting personal hearing to taxpayers. Granting personal hearing was at the discretion of senior officials. This amendment says that cases where a request for personal hearing has been received, the income-tax authority of the relevant unit shall allow such a hearing through the National Faceless Penalty Centre. However, Regional Faceless Penalty Centres (RFPC)’ have been omitted from the faceless penalty scheme. RFPC was responsible to facilitate the conduct of faceless penalty proceedings and imposing penalties in accordance with the provisions of this Scheme.

 

Further, it has specified that the term ‘Penalty Unit’ or ‘Penalty Review Unit’, wherever used in the Faceless Penalty Scheme, shall refer to an Assessing Officer. Such AO has powers as assigned by the Board. Now, instead of preparing a draft order for the imposition of penalty, the penalty unit shall prepare a penalty imposition proposal for the imposition of penalty. The provisions for rectification of mistake under the Faceless Penalty Scheme 2021 has been omitted. Also, An electronic record under this scheme shall be authenticated by all the units, i.e., penalty unit, penalty review unit, technical unit or verification unit, by affixing a digital signature. Earlier, only National Faceless Penalty Centre and the assessee or any other person were required to authenticate records.

 

3. Where there is no FTS clause in a treaty with a Country, the income is assessable as business income and can be taxed in India only if there is a PE

Only the income which is not expressly dealt with in any of the Articles of the Treaty is required to be taxed under Article 22. Where it is apparent from the Financial Statements that the assessee provided certain services to subsidiaries which was akin to Business of the assessee, the same cannot be categorised under Article 22, but has to be classified under Article 7 as Business Income. Such business income will be taxed in the contracting state of which the taxpayer is a resident except for cases where the business operates through a PE in the other contracting state.

It was held in the case of DCIT Vs MICHELIN ROH CO. LTD. [2022-VIL-644-ITAT-DEL] that In the absence of article on FTS, the consideration for service which is business income is automatically taxed in accordance with Article 7, which may result in non taxability in the Indian jurisdiction in the absence of a PE. Therefore, Article 22 has no application.

 

4. Section 273B, a defence against penalty u/s 271G – Reasonable Cause for non-ability to produce information

Inability to provide segment-wise profit & loss account of the AE segment and the non AE segment which is not maintained by the Assessee, would not be a ground for levy of penalty u/s 271G for non-production of information/documents. However, it is important that the Assessee furnishes the necessary details for determination of the arm’s length price and comply with the other requirements of the AO. The same was held by The ITAT-Mumbai in Deputy Commissioner of Income Tax 10(1)(2), Mumbai vs Kama Schachter Jewellery (P) Ltd in ITA No.2010/MUM of 2019 dated February 8, 2021. Recently it is reiterated in DY. COMMISSIONER OF INCOME-TAX Vs RATNAKALA EXPORT PVT LTD [2022-VIL-641-ITAT-MUM]

 

However, it is the our view that as the accounting processes become more sophisticated, it is important for assessees to set in place a system of AE and Non-AE Segment wise P/L A/c generation. As we are witnessing that under GST the Officers insist on State wise trial balances, so also going forward, under Income Tax too AE and Non-AE P/L A/c requirement would not be compromised.

 

5. When MAP is because of the action taken by an income tax authority of the other contracting country, the revenue cannot defer implementing or giving effect to the MAP Settlement

The provisions of the amended Rule 44G(5) stipulate that “there shall not be a decrease in the income or increase in the loss of an assessee in the return of income of a given year, if the MAP is invoked on account of action taken by any income tax authority in India”. This stipulation by converse excludes this rigor when MAP is because of the action taken by an income tax authority of the other contracting country. It is settled law that the terms of DTAA will have precedence even over the provisions of the I-T Act when it is beneficial to an assessee because of the provisions of section 90(2) of the I-T Act.

 

As per Article 27(2) of the DTAA, If the assessee is entitled for correlative benefits, and consequentially refund, as per the MAP, there would be no justifiable reason for denying the same. The same was held in the case of HARMAN CONNECTED SERVICES CORPORATION INDIA PVT LTD Vs JOINT SECRETARY [2022-VIL-132-KAR-DT].

 

6. Can the deductee of TDS file complaint u/s 276B against a debtor?

Section 276B provides that if a person fails to deposit TDS deducted, he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine. The deductees can also seek appropriate relief under this Section. They can approach approach their JAO and he could consider initiation of proceedings under Section 276B of the IT Act.

In this regard, it was held in FIREFLY CREATIVE STUDIO PRIVATE LIMITED Vs UNION OF INDIA [2022-VIL-131-KAR-DT] that The provisions of Section 276B of the IT Act undoubtedly are part of the IT Act to build confidence in the TDS Scheme and every measure as is available in law must be considered to ensure that confidence is sustained, and if necessary by initiation of appropriate proceedings against the defaulters. The assessee must work out his remedy before the JAO and must be reserved liberty in this regard.

 

7. In Tax Cases, sometimes Aggression is the best form of defence

Where the bogus purchases are admitted, the revenue has made a 100% disallowance of the purchases. The assessee even disputes a disallowance of a partial amount of the total of bogus purchase transaction and contends that since there were corresponding sales against such bogus purchase, hence only the differential profit element on bogus purchases should be added back. While the ITAT dismissed both the contentions, yet can it be termed as a win for one side is the question to be asked.

 

The Hon’ble ITAT held in the case of THE ASST. COMMISSIONER OF INCOME TAX Vs PERFECT GARMENTS PROCESSORS [2022-VIL-636-ITAT-MUM], that The assessee when it has sold the goods to the third parties and obtained bogus purchase bills of those goods naturally there would be certain expenditure that assessee has incurred for obtaining such accommodation entries and therefore no infirmity can be found in estimating the profit at the rate of 12.5% of such bogus purchases - There is no justification for retaining profit at the rate of 2% of such bogus purchases as addition.

 

8. Existing Product Development Expenditure is a Revenue Expenditure

The Hon’ble Supreme Court in the case of (i) Empire Jute Co. Ltd. v. CIT, 124 ITR 1 and (ii) Alembic Chemical Works Co. Ltd. v. CIT, 177 ITR 377 (SC) held that expenditure incurred on the existing business incurred in connection with the existing business or Updating existing products should be allowed as revenue expenditure.

 

On the same grounds, it was held in the case of MAHALE BEHR INDIA PVT. LTD. Vs DCIT [2022-VIL-626-ITAT-PNE], that as result of expenditure incurred in development of products no new assets had been brought into existence. The expenditure is only incurred in improving the present products and hence was a revenue expenditure.

 

9. “Advance from the customers” cannot be treated as “sundry creditors”

When an assessment is under limited scrutiny, the powers of the Commissioner u/s.263 of the Act, also get curtailed to the issues directed in the limited scrutiny. It is not open to the CIT to bring interpretation in respect of other issues within the nomenclature of the terms used in the limited scrutiny. If the limited scrutiny is for “sundry creditors”, the powers of the CIT u/s.263 of the Act is limited to the “sundry creditors”. The CIT cannot assume that the “advance from customers” can be treated as “sundry creditors”. The same was held in the case of M/s M.M. ENGINEERS AND CONSULTANTS Vs PRINCIPAL COMMISSIONER OF INCOME TAX, CUTTACK CHARGE, CUTTACK [2022-VIL-629-ITAT-CTK]

 

10. RBI issues norms for gold import by qualified jewellers through IIBX

The RBI vide A.P. (DIR Series) Circular No.04 came up with norms for facilitating physical import of gold through India International Bullion Exchange IFSC (IIBX) or similar authorised exchange by Qualified Jewellers in India. In addition to agencies nominated by the RBI and by DGFT, Qualified Jewellers (QJ) as approved by International Financial Services Centers Authority (IFSCA) were permitted to import gold in January.

 

The RBI issued the guidelines in order to enable resident Qualified Jewellers to import gold through IIBX or any other exchange approved by IFSCA and the Directorate General of Foreign Trade (DGFT). As per the guidelines, banks may allow Qualified Jewellers to remit advance payments for 11 days for import of gold through IIBX in compliance to the extant Foreign Trade Policy and regulations issued under IFSC Act. In case the import of gold through IFSCA authorised exchange, for which advance remittance has been made, does not materialise, or the advance remittance made for the purpose is more than the amount required, the unutilised advance remittance shall be remitted back to the same bank within the specified time limit of 11 days. The Circular also stated that all payments by qualified jewellers for imports of gold through IIBX, shall be made through exchange mechanism as approved by IFSCA.

 

(The author is a FCA, LL.M & LL.B and Partner at Tax Connect Advisory Services LLP. The views expressed are personal. The author is The Chairman Indirect Tax Core Group of CII and The Chairman of The Fiscal Affairs Committee of The Bengal Chamber of Commerce. He has Authored more than 15 books on varied aspects of Direct and Indirect Taxation. E-mail - vivek.jalan@taxconnect.co.in)