Direct Tax Vista Your weekly Direct Tax recap Edn. 50 – 21st March 2023 By Vivek Jalan, Partner, Tax Connect Advisory Services LLP

 

 

1. Committee to recommend Procedure for conduct of internal audit and handling internal audit and revenue audit objections in faceless assessment environment

Under the new faceless assessment regime, the role of officers posted in jurisdictional assessment units changes vis-à-vis the erstwhile manual regime. Further the role of faceless assessment units, technical units, verification units, recovery and transfer pricing for dealing with internal audit objections and revenue audit objections have to be defined. The role and procedure of revenue and internal auditors for audit of JAO, FAO, TRO and TPO itself have to be defined and refined. The procedure for conduct of internal audit and dealing with internal audit objections is governed by Board's Instruction no. 06/2017 dated 21st July, 2017. The procedure to deal with revenue audit objections is governed by Board's Instruction no. 07/2017 dated 21st July, 2017.

 

Now to deal with the new scenarios under faceless assessment regime, a new committee has been formed to relook and redefine the roles of all. We will soon see the new instructions. While this does not have a direct impact on the taxpayers, yet one needs to keep a tab on this as certainly it will have an indirect impact.

 

2. Mere usage of name of Foreign AE not automatically convert a transaction into an international transaction

In many cases, licensed manufacturers operate as risk bearing entrepreneurs, and there is no existence of an ‘agreement’ or ‘arrangement’ or ‘understanding’ with the AE regarding AMP expenditure, the initial onus is on the revenue to show that there is an international transaction for AMP spend.

 

The mere fact that the Indian entity is engaged in the activity of creation, promotion or maintenance of certain brands of its foreign AE or for the creation/promotion of new/existing markets for the AE, cannot by itself be enough to demonstrate that there is an arrangement with the parent company for this activity. The Revenue has to show that there exists an ‘agreement’ or ‘arrangement’ or ‘understanding’ between the AEs whereby the assessee is obliged to spend on AMP in order to promote the brand of the AE. As held by the Supreme Court in CIT v. B.C. Srinivasa Setty (1979) 128 ITR 294 (SC) and PNB Finance Ltd. vs. CIT (2008) 307 ITR 75 (SC), in the absence of any machinery provision, bringing an imagined international transaction to tax is fraught with the danger of invalidation.

 

This would be notwithstanding the fact that –

 

1. The assessee company outsources its entire production requirements to toll manufacturers / contract manufacturers on a licence basis.

2. The assessee procures the raw materials and gets it converted from the third party toll manufacturers.

3. The usage of the foreign brand of the AE as the name of the manufactured product, for eg. Savlon.

 

It cannot be construed that the assessee is not a manufacturer at all and only a distributor simplicitor. The same was held in the case of Philips India Ltd. vs. ACIT in ITA No.2489/Kol/2017 dated 4th April, 2018. The same was also reiterated in the case of PRINCIPAL COMMISSIONER OF INCOME TAX-4, KOLKATA Vs M/s ORGANON (INDIA) PVT LTD [2023-VIL-43-CAL-DT]. The landmark decision though shall always remain the Maruti Decision of 2015.

 

However, this apart, it is advised for taxpayers in such cases to have the following safeguards-

 

1. They should have clear intercompany arrangements by which the transaction is clear.

2. The TP documentation and day-to-day business conduct of the taxpayers have to be such to clearly demonstrate that there is no agreement or tacit understanding with the AE for AMP spends.

3. It must be depicted by the Cost Sheet or any other means or MIS that the AMP expenses are inbuilt in the pricing and duly factored in.

4. It must be depicted that the selling expenses do not construe an AMP spend.

5. Incase there is an understanding then it must be demonstrated by intercompany arrangements, TP documentation and day-to-day business conduct that the decision pertaining to AMP spends has been taken independent of the manufacturing business.

 

3. IBC has overriding effect over provisions of the Income Tax & GST Act

From the time of appointment of Official Liquidator, assessee company becomes defunct and the Official Liquidator steps into the shoes of the assessee. IBC overrides Income Tax as well as GST or over any other enactment for that matter in case of conflicting provisions.

 

The Hon’ble Supreme Court in the case of Pr. CIT v. Monnet Ispat & Energy Ltd. [SLP (C) No.6487 of 2018, dated 10-8-2018] has upheld overriding nature and supremacy of the provisions of the IBC over any other enactment in case of conflicting provisions, by virtue of a non obstante clause contained in section 238 of the Code. The Apex Court in case of Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan (P.) Ltd. [2017] 88taxmann.com 202 has also held that even arbitration proceedings cannot be initiated after imposition of the moratorium u/s 14 (1) (a) has come into effect and it is non est in law and could not have been allowed to continue.

 

U/s 178(6) of the Act, as amended w.e.f. 01.11.2016, the Code shall have overriding effect. The provisions of section 14 of the Code institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority shall be prohibited during the moratorium period under Insolvency and Bankruptcy Code. In the case of ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2(1), KOLKATA Vs AMRIT FEEDS LTD [2023-VIL-338-ITAT-KOL] it was also upheld.

 

Similarly under GST - In Associate Decor Ltd., Versus Assistant Commissioner Of Commercial Taxes, Bengaluru [2021-VIL-535-KAR] the petitioner was served show cause notice (SCN) under section 75 of the CGST Act, 2017 and the petitioner sought setting aside of said noticee on the ground that proceedings under the GST law cannot be allowed to be continued on account of moratorium under insolvency law (IBC). Revenue authorities issued notice because it could hit limitation bar under the GST law if proceedings were initiated after the lifting of moratorium. It was concluded that proceedings under GST cannot be continued when moratorium declared under Insolvency and Bankruptcy Code is in force; proceedings were to be kept in abeyance till lifting of moratorium. Liberty was given to the respondent to continue/initiate proceedings against the petitioner after disposal of the proceedings and lifting of the moratorium and completion of the CIRP.

 

The Implication of GST and the procedure under the GST law for the corporate debtors is discussed vide Notifications and Circulars (CGST Notification – 11/2020 dated 23.3.2020, Circular No.134/04/2020-GST dt. 23.03.2020– and Circular No 138/08/2020)/ Circular No 187/19/2022-GST dated 27.12.2022. Further Circular CBIC-20001/2/2022 – GST clarifies regarding the treatment of statutory dues under GST law in respect of the taxpayers for whom the proceedings have been finalised under Insolvency and Bankruptcy Code.

 

4. 7 years Limitation Period for limitation u/s 201(1) for TDS on NRIs : The Doctrine of "Reasonable Time Period" applies

Section 201 of the Act, as it originally stood did not prescribe any limitation for passing an order under Section 201 of the Act. Subsequently, vide Finance (No.2) Act, 2009 w.e.f. 01.04.2010 sub- section (3) to Section 201 of the Act was inserted thereby providing limitation for passing an order under Section 201(1) of the Act deeming a person to be an “assessee in default” for failure to deduct tax at source in respect of payments to residents. Thereafter, vide Finance Act, 2012, the limitation of four years was extended to six years for passing orders deeming a person to be an “assessee in default” for failure to deduct tax at source in respect of payments to residents with retrospective effect from 01.04.2010. Subsequently, another amendment was brought in vide Finance (No.2) Act, 2014, whereby limitation was further extended from six years to seven years in subsection (3) to Section 201 of the Act deeming a person to be an “assessee in default” for failure to deduct tax at source in respect of payments to residents.

 

No limitation was however prescribed insofar as passing orders under Section 201(1) of the Act deeming a person to be an “assessee in default” for failure to deduct tax at source in respect of payments to non-residents.

 

Doctrine of "Reasonable Time Period" will be applicable for orders under Section 201(1) and must be passed within a reasonable period in the absence of any limitation provided under the Act. In the following judgments, it has been held that four years from the end of the relevant Financial Year would be a reasonable period for the purpose of passing orders under Section 201 of the Act deeming a person to be an “assessee in default” for failure to deduct tax at source in respect of payments to non-residents viz. –

 

i. Commissioner of Income-Tax v. NHK Japan Broadcasting Corporation, 2008 (305) ITR 137 (Delhi)

ii. Bharti Airtel Ltd. v. UOI, (2017) 291 CTR 254,

iii. Vodafone Essar Mobile Services Limited v. Union of India, (2016) 385 ITR 436 (Del).

iv. CIT vs. Hutchision Essar Telecome Ltd., (2010) 323 ITR 230 (Delhi)

v. Director of Income Tax vs. Mahindra and Mahindra Limited [2014] 365ITR 560 (Bom )

vi. CIT v. U.B. Electronic Instruments Ltd 92015) 371 ITR 314 (AP)

vii. CIT v. Bharat Hotels Ltd (2016) 384 ITR 77 (kar)

viii. CIT (TDS) v. Anagram Wellington Assets Management Co. Ltd (2016) 389 ITR 654 (Guj).

 

However, limitation u/s 201(3) for residents was extended to seven years subsequently. Hence, since the object behind any TDS provisions be it with reference to residents/non-residents is to secure the taxes or a portion of it at the earliest and based on the Doctrine of "Reasonable Time Period" it was thus decided in the case of VEDANTA LIMITED Vs THE DEPUTY COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION) [2023-VIL-42-MAD-DT], that 7 years would be the Limitation period for 201(1) cases for TDS on NRIs.

 

5. TDS on CAM u/s 194C and not u/s 194-I

CAM (Common Area Maintenance) charges are paid relating to the maintenance of Common Area, for supply of electricity (main and stand by), water and for providing Security, Housekeeping, Repair and Maintenance, Engineering, Horticulture, Insurance Cover, Marketing and/or any other services, etc. CAM charges are paid for various need based services and not for the use of land, building, land appurtenant to building, Machinery, Plant, Equipment or Furniture or Fittings. Therefore, CAM charges does not fall within the ambit of section 194-1 but u/s 194-C of the Income Tax Act, 1961 as was held in the case of M/s AERO CLUB Vs DCIT, CIRCLE-73(1), NEW DELHI [2023-VIL-330-ITAT-DEL].

 

However, the following points needs to be considered –

 

1. Incase rent is also on sq.ft basis then CAM can be considered as composite rent

2. Incase these are different supplies, It would be better to have two separate invoices

 

(The author is a CA, LL.M & LL.B and Partner at Tax Connect Advisory Services LLP. The views expressed are personal. The author is The Lead - Indirect Tax Core Group of CII- ER 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)