Bi-Month-to-month Tax Publication – March, 2022-April, 2022 – Tax Authorities

DIRECT TAX

AUSTRALIAN GOVERNMENT AGREES TO AMEND ITS DOMESTIC TAX LAWS TO
STOP DOUBLE TAXATION OF INCOME OF INDIAN IT COMPANIES FROM OFFSHORE
SERVICES TO AUSTRALIAN COMPANIES

Article 12 of the Double Taxation Avoidance Agreement between
India and Australia (DTAA) grants Australia the
right to tax income earned by providing technical services as
royalty.

Federal Court of Australia (Federal Court), in
the case of Satyam Computer Services Limited v. Commissioner of
Taxation1, had held that income earned by
Indian information technology (IT) companies for
providing IT services to Australian company through employees based
in India (offshore services) would be taxable as
‘royalty’ in Australia.

The taxpayer, an Indian IT company resident in India, had a
permanent establishment (PE) in Australia and
separately was also providing offshore services to its clients in
Australia. The fees paid to the taxpayer by Australian clients for
providing offshore services was taxed as ‘royalty’ in
Australia, as well as in India under Indian income tax laws. The
taxpayer challenged the decision of imposition of tax in Australia
in the Federal Court.

The taxpayer claimed that: (a) royalty, i.e., income earned for
offshore services, could be taxed in Australia as business income
under Article 7 of the DTAA, only if it was connected to its PE in
Australia. It contended that that since the offshore services were
not undertaken by its Australia PE, such income would not be
taxable in Australia; and (b) income received for offshore services
is not taxable in Australia under its domestic tax law, as under
Australian tax law income of a non-resident taxpayer is taxable
only when it has an Australian source.

However, rejecting the claim of the taxpayer, the Federal Court
held that a portion of payments received by the taxpayer against
offshore services satisfied the definition of ‘royalty’
under Article 12(3)(g) of the DTAA and hence such payments were
liable to tax as royalty income in Australia.

Due to the ruling of the Federal Court, any income earned by
taxpayers for providing offshore services to clients in Australia,
though not taxable under the domestic tax law of Australia, was
made taxable in Australia by virtue of DTAA provisions.

This ambiguity created in respect of taxation of income received
by Indian IT companies for offshore services stands resolved with
India and Australia entering into an Economic Cooperation and Trade
Agreement (ECTA) on April 2, 2022 and signing a
letter of understanding2 under which Australian government
has committed to amend its domestic tax laws, to prevent taxation
in Australia of income earned by Indian IT firms from offshore
services. This development comes as a huge relief to Indian IT
companies which were adversely impacted by the decision of Federal
Court.

SUPREME COURT UPHOLDS VALIDITY OF ASSESSMENT ORDER (AO) PASSED
ON AMALGAMATING COMPANY CEASING TO EXIST POST AMALGAMATION

The Supreme Court (SC), in the case of Mahagun
Realtors Private Limited v. Principal Commissioner of Income Tax
(PCIT)3 distinguished, on facts, its own
decision, in the case of PCIT v. Maruti Suzuki India Limited4 and
upheld the validity of an AO passed in the name of amalgamating
company which ceased to exist post amalgamation.

Mahagun Realtors Private Limited (MRPL or
taxpayer), an Indian company, was engaged in the
business of development of real estate. MRPL and Mahagun India
Private Limited (MIPL) filed for a scheme of
amalgamation with the Delhi High Court (HC) which
was approved by its order dated September 10, 2007 with effect from
May 1, 2006.

Pursuant to MRPL’s filing of its income tax return for
assessment year 2006-07 and subsequent conduct of survey
proceedings by the tax authorities against MRPL, certain
discrepancies were found in MRPL’s books of accounts. Hence,
search and seizure operations were carried out on MRPL group
companies including on MRPL. One of MRPL’s director, during
search and seizure operations, admitted to MRPL having not
disclosed some income in its income tax returns.

In response to various notices from tax authorities to file
income tax return for such undisclosed income, MRPL filed a return
after a period of 4 years. Upon filing of such return, tax
authorities initiated scrutiny assessment and passed an AO in the
name of MRPL (represented by MIPL).

Against the AO, the taxpayer claimed that upon sanction of
amalgamation scheme the taxpayer stood dissolved and hence AO
issued by the tax authorities was invalid.

Disagreeing with the taxpayer, the SC upheld the AO. For coming
to its decision, SC took note that the taxpayer had: (a) not
intimated the tax authorities about amalgamation prior to issue of
AO; and (b) undertaken various compliances such as filing of income
tax returns, filing of appeal, etc., in the name of amalgamating
company (i.e., MRPL) even after sanction of amalgamation
scheme.

SC also laid down a principle that, although post amalgamation,
amalgamating company ceases to exist, the business of amalgamating
company continues with the amalgamated company.

INDIRECT TAX

Re-credit/ restoration of input tax credit (ITC)
inadvertently utilized for integrated goods and service tax (IGST)
payment on exports in electronic credit ledger (ECL)

The Gujarat High Court (HC), in the case of
I-Tech Plastic India Private Limited v. State of Gujarat5, held
that if the authorities have accepted that there was an error in
grant of refund on payment of IGST and resultantly, accepted
repayment of the erroneous refund, as a corollary, the credit of
the ITC must be restored. The HC directed the authorities to
re-credit/ restore ITC in ECL stating that it would otherwise
amount to double taxation which is not permissible under law.

Demand for Business Support Services
(BSS) on revenue sharing agreement between film exhibitors and
distributors set aside by Customs Excise and Service Tax Appellate
Tribunal
(CESTAT), upheld by
Supreme Court (SC)

The SC, in the case of Commissioner of Service Tax v. Inox
Leisure Limited6, while upholding the view taken by
CESTAT held that a revenue sharing arrangement does not necessarily
imply provision of services, unless service provider and service
recipient relationship is established. SC held that CESTAT had
correctly taken the view that since revenue sharing arrangement
between distributors and exhibitors of cinematographic films does
not mean provision of services, the demand against Inox under BSS
was set aside.

Liabilities of the corporate debtor not forming a part
of the resolution plan and not being settled by the National
Company Law Appellate Tribunal (NCLAT) extinguishes on the approval
of the resolution plan

The High Court of Rajasthan, in the case of UltraTech Nathdwara
Cement Limited v. The Commercial Tax Officer, Anti-Evasion, Circle
II-Jaipur7, held that the demands raised by
the operational creditor against the corporate debtor except to the
extent admitted by the NCLAT are to be declared infructuous. When a
resolution plan is approved by the adjudicating authority, it
becomes binding on all the stakeholders, including the creditors,
by virtue of Section 31 of the Insolvency & Bankruptcy Code,
2016. It further held that if the creditor has already received any
amount by way of the amounts deposited under protest and by way of
pre-deposit as mandatory statutory obligation in excess of what has
been approved under the resolution plan, it would have to be
refunded to the successful resolution applicant.

Countervailing Duty (CVD) and Special Additional Duty (SAD)
paid during Goods & Services Tax (GST) regime are entitled to
be refunded

The CESTAT, in the case of Mithila Drugs Private Limited v.
Commissioner, Central Goods and Service Tax8, held that refund of
CVD and SAD under the provisions of Section 142(3) and (6) of the
Central Goods and Services Act, 2017 (CGST Act) is
allowable, as credit is no longer available under the GST regime,
which was however available under the erstwhile regime of central
excise prior to 30.06.2017.

The award of interest in refund and amount must be as per the
statutory provisions of law

The SC, in the case of Union of India v. Willowood Chemicals
Private Limited & Anr.9, held that according to Section 56
of the CGST Act, if an applicant is not refunded any tax ordered to
be refunded under Section 54(5) within 60 days of the application,
interest not exceeding 6 per cent would become payable. The proviso
to said Section prescribes that where any claim of refund arises
from an order passed by Court and if the same is not refunded
within 60 days, the interest payable would be 9 per cent. The SC
held that the instant case did not arise from any order passed by
Court and there was no inordinate delay. The SC further noted that
whenever a specific provision has been made under the statute such
provision has to govern the field.

CIRCULARS AND NOTIFICATIONS

Telangana Government introduced a One Time Settlement
Scheme to settle disputed tax under the legacy acts10

The Government of Telangana has decided to introduce a one-time
settlement scheme to settle disputed tax under the legacy acts such
as Andhra Pradesh General Sales Tax Act, 1957, the Telangana Value
Added Tax Act, 2005, the Central Sales Tax Act, 1956 and the
Telangana Entry of the Goods into Local Areas Act, 2001. For
settlement of disputes under this scheme, each year of assessment
shall be a distinct unit. Additionally, the dealers/ persons
availing the one-time settlement scheme, the interest and penalty
shall be waived off completely.

Footnotes

1.(2018)
FCAFC 172

2.https://www.dfat.gov.au/sites/default/files/aiecta-side-letter-taxation-australia-to-india.pdf

3.Civil
Appeal No. of 2022 (Arising out of SLP (C) No. 4063 of
2020

4.Civil
Appeal No. 5409 of 2019

5.TS-160-HC(GUJ)-2022-GST.

6.TS-93-SC-2022-ST.

7.D.B.
Civil Revision Petition No. 211/2014.

8.Excise
Appeal No. 50808 of 2020-SM.

9.CIVIL
APPEAL NOS.2995-2996 OF 2022.

10.G.O.Ms.No. 45 – REVENUE (CT-II) DEPARTMENT
dated May 9, 2022.

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