Taxpayer’s Choice for Valuation of Shares at Premium Upheld

The Income Tax Appellate Tribunal (ITAT) in the case of M/s. Rameshwaram Strong Glass (P) Ltd. v The Income Tax Officer[1] has upheld the right of the company issuing shares to choose the valuation methodology under the provisions of the Income Tax Act, 1961 (IT Act) read with the rules framed thereunder (Tax Law) for the purposes of determining the ‘fair market value’ (FMV) of such shares at premium. Continue Reading Taxpayer’s Choice for Valuation of Shares at Premium Upheld

Recently, the National Company Law Tribunal (NCLT) rejected Ajanta Pharma Limited’s (Ajanta Pharma) scheme of amalgamation and arrangement (Scheme) between the company and its shareholder Gabs Investments Private Limited (Gabs Investments) on the grounds of General Anti Avoidance Rules (GAAR).

Continue Reading NCLT Smell Tests GAAR! Rejects Ajanta Pharma’s Scheme of Merger on Grounds of Tax Avoidance

With the decision in Sh. Rishi Gupta v. M/s Flipkart Internet Pvt. Ltd.[1], the National Anti-profiteering Authority (NAA) has shifted the focus from the Fast Moving Consumer Goods (FMCG) sector to the e-commerce sector.

In this case, the applicant alleged that the excess amount charged at the time of placing the order should be refunded to him, given that the rate of Goods and Services Tax (GST) reduced from 28% to 18%, between the date of placing the order and the date of supply. It was further alleged that the respondent, i.e. Flipkart, was resorting to profiteering in contravention of the provisions of Section 171 of the Central Goods and Services Tax Act, 2017 (CGST Act), by not refunding the differential amount. Continue Reading Anti-Profiteering Orders – A Right Step Forward? Part II

The Telangana and Andhra Pradesh High Court (High Court) in the case of Leo Edibles and Fats Limited v. TRO, Writ Petition No 8560 of 2018, has allowed the liquidation of assets of a company under the Insolvency and Bankruptcy Code, 2016 (IBC), despite the claim of the tax authorities that they have a charge over it, by virtue of having initiated attachment proceedings under the Income Tax Act, 1961 (IT Act). The High Court, while dealing with the interplay between the IT Act and the IBC, held that the income tax authorities are not at par with ‘secured creditors’ under the IBC.

The petitioner in the instant case had purchased certain property of a company undergoing liquidation under the IBC in an e-auction. The registrar refused to register the transfer in favour of the petitioner due to the attachment notice issued by the tax authorities. Accordingly, the petitioner filed a writ petition challenging the refusal of the registrar to register the sale deed – and sought issuance of direction to the income tax department to withdraw the said attachment.

Continue Reading Decoded: The Interplay Between Tax Law and the Insolvency and Bankruptcy Code

Since its implementation on July 01, 2017, the Goods and Services Tax (GST) regime continues to evolve on various fronts by way of rationalisation of tax rates, availability of exemptions, procedural amendments, etc. While the Government has been relentless in its efforts to iron out every crease, bottlenecks continue to persist. With the benefit of hindsight, here is a critical look at some of the significant triumphs and misses on completion of its first anniversary.

Continue Reading GST – First Report Card

Parties entering into contractual arrangements usually insist on including a clause for liquidated damages to pre-emptively agree upon the amount of reparation that would be payable by either Party on failure to meet its commitment. Generally, such commitments are in the nature of adhering to timelines, fulfillment of conditions, quality of products, etc.

The levy of an indirect tax on the amount of liquidated damages, has faced a series of challenges under the erstwhile service tax regime. Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act was deemed to be service under the service tax regime[1] . Where liquidated damages were in the nature of accidental damages caused due to unforeseen actions and not relatable to the provision of service, these were not included in the value of the service, and hence not to be taxed[2] .

Continue Reading GST Aftermath of Liquidated Damages

The Income Tax Appellate Tribunal, Delhi (ITAT) recently delivered a very significant decision in the case of Nokia Networks O.Y (Assessee)[1] on the issue of its permanent establishment (PE) in India and attribution of income to the PE. The majority of members of the ITAT ruled in favour of the Assessee holding that its Indian subsidiary would not constitute a PE in India, especially in absence of a Service PE clause in the erstwhile India-Finland Tax Treaty (Treaty).

Facts

The Assessee is a resident of Finland and sold GSM equipment manufactured by it to Indian telecom operators, on a principal-to-principal basis. It’s Indian subsidiary, Nokia India Private Limited (NIPL) was either assigned the installation contracts by the Assessee or entered into independent contracts with the customers for installation. NIPL also entered into technical support agreements with customers. NIPL’s income from these activities was taxed in India.

The Assessing Officer (AO) was of the view that NIPL constituted a PE of the Assessee and attributed an additional 30 percent of the profit from the equipment to NIPL. The AO also concluded that 30% of the equipment price pertained to supply of software and sought to tax it as royalty in the hands of the Assessee. On appeal, the ITAT held that NIPL being a virtual projection would form a PE, and attributed to NIPL 20 percent of the Assessee’s profits from the sale of equipment to Indian customers.

Continue Reading Subsidiary is Not a Permanent Establishment but Beware the ‘Virtual Projection’ Risk

The industry has been grappling with uncertainty around anti-profiteering provisions since its introduction. While the Goods and Services Tax (GST) legislation and rules were available in the public domain long before the effective date of July 01, 2017, the rules relating to anti-profiteering were made public only on June 28, 2017.

To everyone’s disappointment these rules failed to bring transparency and clarity to the implementation of anti-profiteering provisions; they merely chalked out the administrative hierarchy and framework of the authorities dealing with anti-profiteering complaints.

Subsequently, the Finance Ministry has made various statements promising clear guidelines on the manner of computation of commensurate benefit to be passed on to customers. However, till date nothing has been notified on this front.
Continue Reading Anti-Profiteering Orders – A Right Step Forward?

The Income Tax Act, 1961 (IT Act) contains several special beneficial provisions that allow for deductions in order to promote certain activities. One such provision is Section 10A of the IT Act, which seeks to promote and boost new business undertakings situated in free trade zones by providing suitable deductions. It provides for a 100 percent deduction of profits and gains derived by undertakings engaged in export of articles or computer software. The deduction is available for ten assessment years from the year in which the entity commences operations. These profits are to be determined based on the ratio of export turnover to the total turnover of the undertaking.

Over the years, there have been several disputes over the manner in which this ratio is to be determined. This is largely because while the term ‘export turnover’ has been defined under Section 10A of the IT Act, “total turnover” has not. In other words, there is no explicit provision that allows the taxpayer to exclude amounts from total turnover in case such amounts have already been excluded from export turnover.

In the recent case of CIT v HCL Technologies Limited[1], the Supreme Court of India dealt with this issue and provided much needed clarity on the subject.

Continue Reading Expenses Excluded from Export Turnover, also to be Excluded from Total Turnover

Stock Appreciation Rights (SARs) are recognised globally as one of the most popular instruments of stock-based compensation. SARs are alternatives adopted for implementing equity-based compensation plans like an employee stock option or employee stock purchase. SARs can be structured as either ‘equity settled’ or ‘cash settled’. As a concept, SARs contemplate passing on of appreciation in the value of a certain number of equity shares to employees.

The Income Tax Act, 1961 (IT Act) did not have any specific provision to tax such income; specific provisions were introduced in 1999 to provide for taxation of benefits provided by an employer to its employees under share benefit rewards. From 1999 onwards, Section 17(2) of the IT Act specifies the payments that come within the ambit of ‘salary’ and ‘perquisites’, and covers benefits available to employees therefrom.

For the period prior to 1999, the issue of taxability of amounts received from various employee benefit programmes, including amounts received from the redemption of SARs, was always under dispute. The special bench of the Mumbai Income Tax Appellate Tribunal (ITAT) in the case of Sumit Bhattacharya[1] held that the amount received on redemption of SARs should be taxable as salary because it was an employment related benefit, in the nature of deferred wages, bonuses or incentives received as a fruit of employment. However, the issue remained inconclusive and litigious. The Supreme Court (SC) appears to have settled this issue in the case of Bharat V. Patel[2], wherein it has been held that the amount received on account of SARs redemption prior to amendment to section 17(2) would not be taxed as salaries.

Continue Reading SC Holds that Income from SARs is Taxed as Capital Gains Only