On 1st April 2021, the Ministry of Finance notifies India Iran Comprehensive DTAA. The same can access by clicking following link-
<a href="https://www.linkedin.com/posts/mnharchandani_india-iran-dtaa-activity-6783812126868869120-sNMq">https://www.linkedin.com/posts/mnharchandani_india-iran-dtaa-activity-6783812126868869120-sNMq</a>
Earlier, there was Limited DTAA between India and Iran.

Ministry of Finance notifies India Iran DTAA

iran india dtaa, dtaa with iran, India Iran DTAA

UN RELEASED THIRD EDITION (2021) PRACTICAL MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES.
 
This third edition of the United Nations Practical Manual on Transfer Pricing for Developing Countries (the Manual) is intended to draw upon the experience of the first edition (2013) and the second edition (2017) including feedback on the latter version, but it is also intended to reflect developments in the area of transfer pricing analysis and administration since that time.
 
An important purpose of this Manual is to contribute to a common understanding of how the arm&rsquo;s length principle is to be applied in order to avoid double taxation and prevent or resolve transfer pricing disputes, as highlighted in paragraph 4 of the Commentary on Article 9 of the UN Model Convention.
 
Click below to download pdf file of United Nations (UN) Practical Manual on Transfer Pricing for Developing Countries 2021-
<div class="wp-block-file"><a href="https://www.un.org/development/desa/financing/sites/www.un.org.development.desa.financing/files/2021-04/TP_2021_final_web%20%281%29.pdf">https://www.un.org/development/desa/financing/sites/www.un.org.development.desa.financing/files/2021-04/TP_2021_final_web%20%281%29.pdf</a></div>
<div class="wp-block-file">&nbsp;</div>

United Nations (UN) released Practical Manual on Transfer Pricing for Developing Countries 2021

Hon'ble Madras HC in its recent decision upheld the findings of Tribunal and observe that the only expenditure, which was proved to be incurred in relation to earning of tax free income, could be disallowed and such provision could not be extended to disallow the expenditure, which was assumed to have been incurred for earning tax free income.
 
The AO found that the assessee had invested in SBI Magnum Insta Cash Fund to the tune of Rs.7.25 Crores and secured loans, which were outstanding as on 31.3.2011. The Assessing Officer also found that the assessee incurred finance cost, out of which, a sum of Rs. 12.93 Crores was towards interest on term loan and working capital facilities, that the assessee company made investments in mutual funds, out of which, there was a POSSIBILITY OF EARNING DIVIDEND INCOME. Accordingly, a notice was issued to show cause as to why the disallowance should not be made under Section 14A of the Act.
 
The assessee sent a reply stating that they had not incurred any expenditure for making such investment and that in the absence of any expenditure incurred, the question of disallowance did not arise. However, AO rejected the stand taken by the assessee and made disallowance u/s 14A.
 
The assessee preferred an appeal before the CIT(A) who allowed the appeal by order dated 16.6.2016. The CIT(A) accepted the stand taken by the assessee that the investments were in growth funds and not dividend funds and therefore, did not constitute tax free income. In this regard, the CIT(A) referred to the decision of the Delhi High Court in the case of Cheminvest Ltd. Vs. CIT [reported in (2015) 378 ITR 33] as well as the decision of the Chennai Tribunal in the case of ACIT Vs. M.Baskaran [ITA.No.1717/Mds/2013 dated 31.7.2014] and accordingly set aside the finding rendered by the Assessing Officer. The Tribunal took note of the decision of this Court in the case of Redington India Ltd. Vs. CIT [reported in (2017) 77 Taxmann.com 257] and dismissed the appeal filed by the Revenue.
 
The Hon'ble Madras HC held that "we find that the Tribunal rightly understood the scope of the transaction done by the assessee. The consistent case of the assessee was that they invested a sum of Rs.7.25 crores in SBI Magnum Insta Cash Fund, that the amount was invested on 30.3.2011, that they had not incurred any expenditure in making such investment and that at the year end, the assessee did not earn tax free income from such investments. In terms of Section 14A of the Act, the only expenditure, which was proved to be incurred in relation to earning of tax free income, could be disallowed and such provision could not be extended to disallow the expenditure, which was assumed to have been incurred for earning tax free income."
 
Hon'ble HC also observed that "to apply the provisions of Section 14A of the Act, the Assessing Officer should have recorded a finding as to how SubSection (1) of Section 14A of the Act would stand attracted. In the absence of any such finding, the disallowance made was not justifiable. In fact, the Assessing Officer straightaway proceeded to the second limb of Section 14(2) of the Act, which is impermissible. The Tribunal rightly took note of the decision in the case of Redington India Ltd., wherein it was held that the provisions of Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 cannot be made applicable in vacuum i.e in the absence of exempt income. Therefore, we find that the Tribunal was right in deciding the issue against the Revenue and in favour of the assessee."
 
Citation: Tax Case Appeal No.26 of 2018, Madras HC.

Investment in Growth Fund does not attract 14A disallowance

Mutual fund taxation, growth fund, 14A deduction, income tax

The Finance Act, 2020 inserted new provisions related to the TCS on sale, TCS on liberalised remittance scheme and TCS on overseas tour program package, which are going to be applicable for 1st October, 2020.
 
Please <a href="https://www.linkedin.com/posts/mnharchandani_tcs-on-sale-lrs-and-foreign-travel-analysis-activity-6717006959926665216-EAGg" target="_blank" rel="noreferrer noopener">click here</a> to access the analysis on TCS on Sale, LRS and Foreign Travel in presentation mode.

TCS on Sale, LRS and Foreign Travel - Analysis

tcs on sales purchase, tds on sales purchase tcs on LRS

The Hon'ble Supreme Court in it's recent decision in the case of DIT vs. Samsung Heavy Industries (Civil Appeal No. 12183 of 2016) dismissed the appeal of the department and held that project office of the assessee is not permanent establishment within the meaning of the Article 5 of India-Korea DTAA. Although, it is settled position of law that the Project Office is PE (subject to threshold of numbers of days as per relevant DTAA), however, looking the facts of the case, the Hon'ble Supreme Court held that the Project Office in the question is not a PE withing the meaning of the Article 5(1) of DTAA rather it would fall within Article 5(4)(e) of the DTAA. Lets the discuss the facts of the case and findings of the each authority.
 
The critical fact of the case are that the ONGC awarded a &ldquo;turnkey&rdquo; contract to a consortium comprising of the Assessee, i.e. Samsung Heavy Industries Co. Ltd. (a Company incorporated in South Korea), and Larsen &amp; Toubro Limited, being a contract for carrying out the &ldquo;Work&rdquo;, inter alia, of surveys, design, engineering, procurement, fabrication, installation and modification at existing facilities, and start-up and commissioning of entire facilities covered under the &lsquo;Vasai East Development Project&rsquo;
 
The Assessee set up a Project Office in Mumbai, India, which, as per the Assessee, was to act as &ldquo;a communication channel&rdquo; between the Assessee and ONGC in respect of the Project. Accordingly for the AY 2007-08 the assessee filed nil return and claimed the losses.
 
During the assessment proceedings, the AO concluded that "the Project in question is a single indivisible &ldquo;turnkey&rdquo; project, whereby ONGC was to take over a project that is completed only in India. Resultantly, profits arising from the successful commissioning of the Project would also arise only in India."
 
The DRP also concluded that "the Assessing Officer has given a specific finding that the assessee had a project office in India, when it was given the contract. The assessee has not contested the existence of the Project office in India but it has only contested that the project was used merely for preparatory and auxiliary activities. This submission of the assessee does not hold merit because if it wanted to perform only preparatory and auxiliary activities then it could have opened a liaison office. The opening of a project office clearly shows that the assessee was doing something more than what would have been done through liaison office. In any case nature and purport of activities undertaken in India determine the existence of PE. Considering the nature of activities undertaken in India it is clear that PE existed in the case of assessee."
 
During the hearing before the ITAT, the Ld. DR bought on record the resolution of Board of Directors meeting dated 3rd April, 2006. The opening para of said resolution provides that "the company hereby open one project office in Mumbai, India for coordination and execution of Vasai East Development Project for Oil and Natural Gas Corporation (&ldquo;ONGC&rdquo;), India". Based on such resolution, the Ld. DR concluded that these documents make it clear that all the activities to be carried out in respect of impugned contract will be routed through the project office only. However, it is noteworthy to state here that the Ld. DR only reproduce the first para of the Board Resolution, the second para of said resolution provides that "That the Company hereby does make and constitute Mr. Sangsoon Park Yard General Manager of the Company, as the Company&rsquo;s true and lawful representative with full power and authority for the purpose of establishing a project office and coordinating and executing delivery of documents in connection with construction of offshore platform modification of existing facilities for ONGC above."
 
On other hand, the assessee before the ITAT argued that the Project Office was only an auxiliary office, and did not involve itself in any core activity of business, as accounts that were produced would show that there was no expenditure which related to execution of the project. The Hon'ble Tribunal disposed off that argument of the assessee by stating that "the way the terms of the contract are described and the way the work on contract has to proceed clearly describe that in all the activities of contract there will be the role of Mumbai project office as the same has to work as a channel between assessee company and ONGC. If PE of the assessee exists within the meaning of Article 5.1 and 5.2 and assessee claims that despite there being PE in terms of clause 5.1 and 5.2, it falls under exclusionary Article 5.4 then onus is on assessee to prove that activities of its PE are in the nature of preparatory or auxiliary in nature. No material has been brought on record by the assessee to prove the said fact. The arguments put forward in this respect are only by inference such as the accounts maintained by the assessee in India through which it is the argument of the ld. Counsel of the assessee that it does not contain any expenditure relating to execution of the contract. But such argument is not acceptable as the maintenance of account is in the hands of assessee and mere the mode of maintaining the accounts alone cannot determine the character of PE as the role of PE only will be relevant to determine what kind of activities it has carried on." However, the ITAT found that there was a lack of material to ascertain as to what extent activities of the business were carried on by the Assessee through the Mumbai Project Office, and therefore it was considered just and proper to set aside the attribution of 25% of gross revenue earned outside India &ndash; which was attributed as income earned from the Mumbai project office &ndash; the matter being sent back to the Assessing Officer to ascertain profits attributable to the Mumbai project office after examining the necessary facts.
 
Surprisingly, the Hon'ble High Court pronounced its decision on entire different footing. The core grievance of the assessee was regarding considering the PO as PE by the lower authorities looking to the peculiar facts and circumstances of the case. However, the High Court re-framed the question of law as "can it be said that the Agreement permitted the India Taxing Authority to arbitrarily fix a part of the revenue to the permanent establishment of the appellant in India?&rdquo;
 
Accordingly, the Hon'ble High Court held - "that being the situation we allow the appeal, set aside the judgment and order under appeal as well as the assessment order insofar as the same relates to imposition of tax liability on the 25% of the receipt upon the appellant in the circumstances mentioned above, and observe that the questions of law formulated by us, while admitting the appeal, have not, in fact, arisen on the facts and circumstances of the case, but the real question was, whether the tax liability could be fastened without establishing that the same is attributable to the tax identity or permanent establishment of the enterprise situate in India and the same, we think, is answered in the negative and in favour of the appellant."
 
However, the Supreme Court while pronouncing its decision, gone into details and considered the findings of the all lower authorities. The critical findings of the Hon'ble Supreme Court are with regards to documents filed by the assessee before the RBI and which was heavily relied by the ITAT also. The Hon'ble quote the Board Resolution of the assessee company and held that "A reading of the Board Resolution would show that the Project Office was established to coordinate and execute &ldquo;delivery documents in connection with construction of offshore platform modification of existing facilities for ONGC&rdquo;. Unfortunately, the ITAT relied upon only the first paragraph of the Board Resolution, and then jumped to the conclusion that the Mumbai office was for coordination and execution of the project itself. The finding, therefore, that the Mumbai office was not a mere liaison office, but was involved in the core activity of execution of the project itself is therefore clearly perverse. Equally, when it was pointed out that the accounts of the Mumbai office showed that no expenditure relating to the execution of the contract was incurred, the ITAT rejected the argument, stating that as accounts are in the hands of the Assessee, the mere mode of maintaining accounts alone cannot determine the character of permanent establishment. This is another perverse finding which is set aside."
 
The Hon'ble Supreme Court further observe that "Though it was pointed out to the ITAT that there were only two persons working in the Mumbai office, neither of whom was qualified to perform any core activity of the Assessee, the ITAT chose to ignore the same. This being the case, it is clear, therefore, that no permanent establishment has been set up within the meaning of Article 5(1) of the DTAA, as the Mumbai Project Office cannot be said to be a fixed place of business through which the core business of the Assessee was wholly or partly carried on. Also, as correctly argued by Shri Ganesh, the Mumbai Project Office, on the facts of the present case, would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC."
 
Therefore, it is rightly to conclude here that for the purpose of applying the DTAA, the legal form is not much relevant where the facts says something different. In this case, even the office of the assessee was registered as Project Office with the RBI, however, the Supreme Court went on the facts, considered the actual activities carried out by such office, considered the purpose of such office and concluded that the Project Office in question is not a PE rather it would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC.
 
(views are personal, for more details, it is advisable to go through with the order of the SC)

Project Office is not PE; SC affirm substance over legal form

project office, LO PO BO FEMA, Permanent Establishment Income tax

Get the insight of important judicial precedent on Section 36(1)(iii) by clicking on the following link-
 
<h2><a href="https://public.tableau.com/shared/BMY3C6KS7?:display_count=y&amp;:origin=viz_share_link&amp;:showVizHome=no" target="_blank" rel="noreferrer noopener">Tableau Public (Link)</a></h2>
 
Just hover over the chart area, you will get the citation and head note of the case law.
 
Author, Manish Harchandani, CA

Insight of important judicial precedent on Section 36(1)(iii).

judgments on section 36(1)(iii) interest deduction, tax benefit 

A formal Memorandum of Understanding (MoU) was signed today between the CBDT) and the SEBI for data exchange. This will facilitate the sharing of data and information between SEBI and CBDT on an automatic and regular basis. The information will also be shared on request and&nbsp;suo moto&nbsp;basis for the purpose of carrying out their functions under various laws. The formal press release is as under:
https://www.sebi.gov.in/media/press-releases/jul-2020/sebi-signs-mou-with-cbdt_47030.html

CBDT and SEBI sign MoU for data sharing

CBDT Income tax MoU with SEBI, data sharing MoU

Mumbai ITAT allowed the appeal of assessee by relying upon the judgement in the assessee's own cases for the AY 2003-04 to AY 2011-12.
 
During the course of assessment proceedings, it was submitted by the assessee that the Tribunal in its own case for A.Y 2003-04, A.Y 2005-06, A.Y 2006-07, A.Y 2007-08, A.Y 2009-10 &amp; A.Y 2011-12, had held the receipts earned by the assessee under similar fact pattern as its &ldquo;business income&rdquo;, which in the absence of its &ldquo;Permanent Establishment&rdquo; (PE) in India were not taxable in India. Further, the assessee drawing support from the &ldquo;Software Distribution Agreements submitted, that the distributors/resellers sold the shrink-wrap software bought in the fully packaged condition, as received from the assessee to the end users in India i.e without opening the package. It was further submitted by the assessee, that the SolidWorks software was given to the customers in India along with and pursuant to an end user license agreement. Although the end user license agreement was not physically signed, it was buit-in-as a part of the installation process and would &lsquo;pop up&rsquo; on the computer screen, and had to be indispensably &lsquo;accepted&rsquo; by the user, as it was only then the user could operate the software. It was further submitted by the assesee, that the end-user had limited rights to use the software for internal purposes, right to copy the software on hard disk or to make copies for archive purpose. It was the clam of the assessee, that the end-user was divested of any right to transfer the software or reproduce the same, as the same per the terms of the license agreement were specifically prohibited. The assessee also made submissions before the A.O on the scope of the term &lsquo;royalty&rsquo; as per &lsquo;Explanation 2&rsquo; to Sec. 9(1)(vi); the meaning of the term &lsquo;copyright&rsquo; under the Copyright Act, 1957; the amendment introducing &lsquo;Explanation 4&rsquo; below Sec. 9(1)(vi) and its impact on software distributor and on the DTAA; and the definition of &lsquo;royalty&rsquo; under the India-USA tax treaty.
 
A.O after deliberating on the contentions advanced by the assessee, therein observed, that as per the &lsquo;License and Subscription Service Agreement&rsquo;, SolidWorks granted the end-user a non-exclusive nontransferable license to use the software and the printed or electronic documentation. I was observed by the A.O, that in lieu of the single user license which entitled the end-user to use one copy of the software or a multiple user or network license, as the case may be, the end-user would pay license fees. Admittedly, as claimed by the assessee, it was observed by the A.O that the software was owned by SolidWorks and the copyright, trademark and proprietary rights were retained by it and not transferred to the end-user. At the same time, the A.O held a conviction that the software was not goods or tangible property but was an intangible intellectual property, which being similar to patent, invention, design, secret formula etc. would fall within the meaning of &lsquo;process&rsquo; as mentioned in &lsquo;Explanation 2&rsquo; to the definition of &lsquo;royalty&rsquo; under the Act. In support of his aforesaid view, the A.O relied on the CBDT Circular No. 621 of 19/12/1991 to hold that payment for acquisition of software was to be held as &lsquo;royalty&rsquo;. Insofar the claim of the assessee that the issue was covered in its favor by the orders of the Tribunal in its own case for the preceding years, the A.O observed that the same had been assailed by the revenue before the Hon&rsquo;ble High Court, and thus had not yet attained finality.
 
Also, it was observed by the A.O, that the Hon&rsquo;ble High Court of Karnataka in the case of CIT Vs. Samsung Electronic Co. Ltd (2012) 345 ITR 494 (Kar), had concluded, that the payments received by the assessee from the resellers in India for the acquisition of computer software was in the nature of &lsquo;royalty&rsquo;, and thus chargeable to tax. Also, the A.O in order to drive home his aforesaid conviction relied on the amendment to &lsquo;Explanation 4&rsquo; to Sec. 9(1)(vi) of the Act, that was made available on the statute vide the Finance Act, 2012, w.r.e.f 01.06.1976.
 
The Tribunal concluded that the factual situation pertaining to the year under consideration had not witnessed any change as in comparison to the immediately preceding year, therefore, respectfully following the view taken by the Tribunal in the assesses own case for A.Y 2015-16 in ITA No. 7027/Mum/2018, dated 10.01.2020, we herein conclude that the addition made by the A.O by treating the sale receipts of shrink-wrap software as &lsquo;royalty&rsquo; cannot be sustained, and is hereby vacated.
 
Citation: ITA No. 7313/MUM/2019
 
Author, Manish Harchandani, CA
 
Disclaimer:&nbsp;The contents of this article are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Harchandani &amp; Associates does not accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.

Shrink-wrap software is not Royalty - Mumbai ITAT

tds on software, shrikwrap software, tds on payment for software 

Hon'ble Kolkata ITAT allowed the appeal of the assessee and directed the AO to re-compute the disallowance under Rule 8D(2)(iii) by taking into consideration only the value of investment in shares which actually fetched exempt dividend income to the assessee during the year under consideration.
 
The learned counsel for the assessee had contended that the disallowance u/s 14A read with rule 8D is required to be worked out by taking into consideration only the value of investment in shares which actually fetched the exempt dividend income to the assessee and not the value of entire investment as done by the AO. This contention of the learned counsel for the assessee was duly supported by the decision of Hon'ble Kolkata High Court in the case of REI Agro Ltd. GA No. 3022 of 2013 (ITAT No. 161 of 2013).
 
Citation: ITA No. 2061/Kol/2019
 
Author, Manish Harchandani, CA
 
Disclaimer: The contents of this article are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Harchandani &amp; Associates does not accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.

Disallowance u/s 14A r.w. rule 8D to be made by taking into consideration only the value of investment in shares which actually fetched exempt income and not the all investments

14A disallowance, Rule 8D, investment in shares 14A disallowance

Delhi ITAT delete the addition made on account of agency commission paid to Foreign Party (Non Resident) - relied on assessee's own case, wherein it was held that
 
<blockquote class="wp-block-quote">
"the assessee-firm&nbsp; made&nbsp; payments&nbsp; of commission&nbsp; to&nbsp; those&nbsp; agents,&nbsp; since&nbsp; those agents had&nbsp; their&nbsp; offices&nbsp; situated&nbsp; abroad&nbsp; and, moreover, services&nbsp; were&nbsp; also&nbsp; rendered&nbsp; by them&nbsp; outside&nbsp; India, assessee&nbsp; was&nbsp; not required&nbsp; to&nbsp; deduct&nbsp; tax&nbsp; at&nbsp; source while making&nbsp; payments&nbsp; in&nbsp; question.&rdquo;
</blockquote>
 
Citation: ITA.No.5959/Del./2017
 
Author,
 
Manish Harchandani, CA
 
https://harchandani.in/

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