Nangia & Co - Tax and Regulatory Newsletter - April 16-30, 2015
Nangia & Co - Tax and Regulatory Newsletter - April 16-30, 2015
Published on: Mar 3, 2016
Transcripts - Nangia & Co - Tax and Regulatory Newsletter - April 16-30, 2015
1. Pune Tribunal applies Treaty rate over the higher tax rate
under the ITL even in the absence of Permanent Account
2. CBDT circular clarifies overseas dividend not covered by
indirect transfer provisions of the ITL
3. Tribunal grants relief, states notional interest unwarranted
since taxpayer’s margin are more than working capital
adjusted margins of comparables; Also held that closely
linked transactions can be benchmarked together.
4. Mandatory pre-deposit for appeal to CESTAT not applicable
where lis commences pre 2014
1. Pune Tribunal applies Treaty rate over the
higher tax rate under the ITL even in the
absence of Permanent Account Number1
Under the provisions of section
206AA of the Income-tax Act,
1961 (‘the Act’), a non-resident
who receives any taxable
amount is required to furnish a
valid Permanent Account
Number (PAN) to the payer of
such amount, failing which, tax
is required to be withheld at
the higher of the following
Rate specified in the Act; or
Rate in force (lower of the rate as specified in the relevant
Finance Act or DTAA); or 20%.
The requirement of furnishing a PAN was to ensure reporting
compliance, address concerns on refund of taxes withheld etc.
However, recently the Pune Income Tax Appellate Tribunal (‘ITAT’)
in the case of Serum Institute of India Ltd. (‘the assessee’), dealt
with the issue of applicability of higher rate of 20% as prescribed
1 ITA No. 792/PN/2013
under the Act for tax withholding
where the non-resident does not
furnish a valid PAN, as compared
to the lower tax rate prescribed
for payments in the nature of
interest /royalty/fees for
technical services (‘FTS’) under
the relevant Double Taxation
Avoidance Agreement (‘DTAA’).
The ITAT held that the higher
rate prescribed under the Act
would not prevail over the lower
rate under the DTAA on account
of a specific provision which
permits an resident to claim
benefit under the Act only to the extent it is advantageous.
Accordingly, the Act cannot override the beneficial provisions of the
DTAA. Therefore, the lower tax rate prescribed under the DTAA
applies, whether or not the non-resident furnishes a valid PAN.
The applicability of higher withholding tax rate, in the absence of a
PAN, has been a contentious/ vexed issue, wherein the Tax
Authorities had aggressively targeted payers who had failed to
withhold tax at the higher rate of 20% and has disallowed
expenditure, initiated recovery proceedings and also levied interest.
This decision of the ITAT is a welcome relief for both, the payer and
the non-resident recipient. The ITAT has reaffirmed the well-settled
principle that provisions of the DTAA prevail over the Act and that
the Act cannot supersede the DTAA. Accordingly, where the Act
provides for any onerous obligation, which is in direct conflict with
the DTAA, the same would not be valid.
2. CBDT circular clarifies overseas dividend
not covered by indirect transfer provisions of
The Act provides for
taxation of gains arising
from transfer of a capital
asset situated in India.
Finance Act 2012 amended
section 9 retrospectively to
tax indirect transfer of an
Indian company, by
providing that a share or
interest in a company or
entity registered or
incorporated outside India
would be deemed to be situated in India if the share or interest
derives, directly or indirectly, its value substantially from assets
located in India.
Since the indirect transfer provisions created fiction of deeming
shares of a foreign company to be situated in India, it was
apprehended that such provisions may result in taxation of dividend
income declared by a foreign company outside India. It was
perceived that this may cause unintended tax consequences
contrary to the intent of indirect transfer provisions. This aspect was
also highlighted by an expert committee set up by the Government
of India, under the chairmanship of Dr. Parthasarthi Shome, which
examined the scope of the indirect transfer provisions.
expert committee had recommended that such dividend paid by the
foreign company should be excluded from the purview of the indirect
In this regard, while presenting the Union Budget 2015, the Finance
Minister of India had mentioned in his Speech that the concerns
raised shall be addressed by the CBDT through a clarificatory circular.
Pursuant to above, The Central Board of Direct taxes (CBDT), has now
issued Circular 4 of 2015 (dated 26 March 2015), clarifying that
declaration of dividend outside India by a foreign company would not
be taxable in India under the provisions of section 9 of the Act
regarding indirect transfer of assets located in India, since such
declaration and payment of dividend does not have an effect of
transfer of any underlying asset located in India.
The CBDT Circular definitely dispels the foreseen controversy with
respect to foreign dividend and is a welcome move since it lays down
a framework for a specific application of the Explanation introduced
retroactively. The Circular would also be welcomed by overseas funds
having India as their investment destination. Further since the
Circular expressly clarifies that declaration of dividends by foreign
company does not have the effect of any transfer of underlying asset,
the circular should also benefit any litigation initiated prior to the
issue of such Circular via-a-via taxation of foreign dividends.
3. Tribunal grants relief, states notional interest
unwarranted since taxpayer’s margin are more
than working capital adjusted margins of
comparables; Also held that closely linked
transactions can be benchmarked together.
Facts of the case
Kusum Healthcare Private Limited,
(“the taxpayer”), is a company
which principally manufactures
and markets pharmaceutical
products. The taxpayer is engaged
in export of pharmaceutical
products to its overseas associated
enterprise (“AE”) as well as third
During Assessment Year (“AY”) 2010-11, the taxpayer was involved
in export of pharmaceutical products (manufactured/ traded) to its
AE. The taxpayer benchmarked the aforesaid international
transactions using Transactional Net Margin Method (“TNMM”) with
Profit level indicator (“PLI”) of operating profit/operating cost.
During the course of the assessment proceedings, the above
transactions were accepted by the Transfer Pricing Officer (“TPO”) to
be at the arm’s length. However, the TPO, using the Comparable
Uncontrolled Price (“CUP”) method, imputed a notional interest
based on SBI Prime Lending Rate (“PLR”) plus 300 basis points
(resulting in interest rate of 14.88%), with regard to receivable
outstanding for a period exceeding 180 days resulting into Transfer
Pricing (“TP”) adjustment of INR 1,57,54,943. Accordingly, the
Assessing Officer (“AO”) incorporated the above adjustment in the
draft assessment order.
Further, The Dispute Resolution Panel (“DRP”) held that the TPO was
justified in considering the impugned transaction as an international
transaction and benchmarking it separately by applying CUP method.
The DRP directed the TPO to apply SBI base rate (as on 30th June of
the relevant previous year) plus 150 basis points and allow relief for
interest forgone on outstanding receivable balances with third
parties. Accordingly, the AO revised the amount of TP adjustment to
INR 9,369,275 in its final assessment order.
Aggrieved by the same the taxpayer filed an appeal before the
Income Tax Appellate Tribunal (“ITAT”). The ITAT ruling along with
its observations is discussed as under:
Notional Interest unwarranted since the taxpayer earns
significantly higher margin than the comparable companies which
compensates for the credit period extended to the AEs
The ITAT observed that an uncontrolled entity will expect to earn a
market rate of return on its working capital investment independent
of the function it performs or the products it provides. However, the
amount of working capital required to support these functions varies
on account of the different level of inventories, debtors and
creditors. The ITAT held that high levels accounts receivable and
inventory tend to overstate the operating results while high levels of
accounts payable tend to understate them necessitating appropriate
adjustment and thus, appropriate adjustments need to be considered
to bring parity in the working capital of the taxpayer and the
comparable companies rather than looking at the receivables
ITAT further observed that the taxpayer had submitted a working
capital adjustment for the comparable companies selected in its TP
report. The ITAT held that the taxpayer’s analysis has demonstrated
the differential impact of working capital of the vis-a-vis its
comparable companies in the pricing/profitability of the taxpayer
which is more than that working capital adjusted margin of the
comparables. Based thereon, the ITAT held that since the
pricing/profitability of the taxpayer are more than the working
capital adjusted margin of the comparables, additional imputation of
interest on the outstanding receivable is not warranted. For this
purpose, the ITAT relied on the case of Micro Ink Ltd Vs. ACIT [ITA No.
1668/AHD./2006] wherein the tribunal upheld the above principle
and deleted the adjustment on account of alleged excess credit
period allowed to AE and held that any separate adjustment on
the pretext of outstanding receivables while accepting the
comparable companies and transfer price of underlying transaction
i.e. sale of goods by application of TNMM is unjustified.
Closely linked transactions can be benchmarked together
In addition to above, the ITAT held that principle of aggregation is a
well established rule in the TP analysis which seeks to combine all
functionally similar transactions wherein the arm’s length price
(“ALP”) can be determined for a number of transactions taken
together. In this regard, ITAT placed reliance upon the ruling of
Hon’ble Delhi High Court in case of Sony Ericsson Mobile
Communication Private Limited [TS-96-HC-2015(DEL)-TP].
ITAT concluded that the taxpayer had earned significantly higher
margin than the comparable companies which compensates for the
credit period extended to the AEs and thus, the approach by the
taxpayer of aggregating the international transactions pertaining to
sale of goods to AE and receivables arising from such transactions is
in accordance with the established TP principles. Accordingly, the
ITAT allowed the appeal of the taxpayer.
Source: Kusum Healthcare Pvt Ltd Vs. ACIT [ITA No. 6814/Del/2014]
4. Mandatory pre-deposit for appeal to CESTAT
not applicable where lis commences pre 2014
M/s Muthoot Finance Ltd.
[‘Assessee’] engaged in the
business of lending money to
customers, against gold pledged
by the said customers with the
Assessee. The Assessee in turn
assign the loan amounts to
reputed banks who pays the
purchase consideration for the
loan amounts as the total of the
principal amount, Interest and
other charges. The Authorities computed the difference between the
purchase price and the book value of receivables as consideration and
proposed service tax demand on the same. Subsequently, order
confirming demand of service tax was passed by the Authorities.
Aggrieved by the same, the Assessee filed a writ before the High
Court of Kerala.
The High Court of Kerala observed and ruled as under –
As the Assessee has an alternate remedy under the provisions of
Finance Act 1994, assessee can prefer an appeal before the CESTAT.
Relying on the prima facie view of the High Court of Telangana &
Andhra Pradesh that the institution of a suit carries with it an
implication that all rights of appeal then in force are preserved to the
parties thereto till the rest of the career of the suit. Further, the right
of appeal that is vested is to be governed by the law prevailing at the
date of institution of the suit or proceeding and not by the law that
prevails at the date of its decision or at the date of filing of the appeal.
As in the Assessee’s case lis commenced in 2012, the Assessee is not
required to make any make pre-deposit of 7.5% of the demand, as
required pursuant to the 2014 amendment. Assessee can file appeal
together with the application of waiver of pre-deposit.
[Source: M/s Muthoot Finance Ltd V. Union of India & CCE, Kochi In
writ petition No. 6173 of 2015(V)]
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