Tuesday, 21 November 2017

HC : Judges split over non-discrimination benefit, requirement to examine PE-status for TDS u/s 195

Delhi HC judges differ on the interplay between Sec 40(a)(i) expense disallowance for Sec. 195 TDS default on payment by assessee (Mitsubishi India, ‘MI’) to group companies (based in Japan, US, Singapore, Thailand) including Mitsubishi Corporation, Japan (‘MC’)  and the application of 'non-discrimination' clause under respective DTAAs for AY 2006-07,  places the matter before Acting Chief Justice for appropriate orders; Justice Prathiba M. Singh overturns ITAT order, holds that co-ordinate bench decision in Herbalife (rendered in context of AY 2001-02) was not applicable to present case as the scheme of the Act has undergone a substantial change subsequently; Rejects assessee’s argument that the discrimination, qua payments made to residents and non-residents, continued until  April 1, 2015 when Sec. 40(a)(ia) was amended, remarks that this argument “ignores the retrospective nature of the amendment made to Sec. 195 by insertion of Explanation 2.”; Holds that SC's GE India Technology ruling is not applicable as it relates to AY prior to insertion of Explanation 2 to Sec.195, opines that "Addition of the said explanation, in the present case, changes the nature of the payment inasmuch as it takes away the need to establish existence of a PE or a business connection in India."; With respect to assessee’s stand that payments were in the nature of purchases from group companies (and TDS on goods purchases does not apply to an Indian resident) , Justice Singh opines that “even if the payment is for purchase of goods it does not exempt the payer from making deduction of tax at source”; Justice Singh clarifies that "Section 195 and Section 40 operate in different spaces - the former at the stage of payment by the payer to the payee, and the latter at the stage of assessment of the payer. Insofar as the payer is concerned, there may be interlinking of the two however, insofar as the payee is concerned.. Section 40 is not triggered qua it at this stage"; Further opines that a resident company per se cannot  invoke the discrimination provisions of the DTAA, unless raised by non-resident payees; Justice Singh clarifies that a resident company is fully bound by the provisions of the Act, and for the said purpose the existence of a PE of the payee is not essential, “What is required to be seen is as to whether the sum is chargeable under the provisions of the Act and for the said purpose even a ‘business connection’ is sufficient as per Explanation 2 to Section 9 of the Act.”; However, Justice S. Muralidhar dissents and rules in favour of assessee, approves ITAT view that Herbalife decision squarely applied to present case as the element of discrimination continued in relevant AY; Comparing two sub-clauses i.e. (i) and (ia) of Sec. 40(a), as they stood during AY 2006-07, Justice Muralidhar notes that the expression ‘or other sum chargeable under the Act’ occurring in sub-clause (i) was missing in sub-clause (ia), highlights the distinction as regards the consequence of disallowance for non-deduction of TDS on payment to non-resident for purchases, continued, which was ultimately done away with only by the amendment of sub-clause (ia) w.e.f. April 1, 2015; Extensively cites SC rulings in GE India Technology , Transmission Corporation, opines that “Explanation 2 to Section 195 (1) will not compel deduction of TDS where the payer is reasonably certain that the sum paid for purchases is not chargeable to tax.”; Justice Muralidhar further clarifies that Explanation 2 does not dispense with the fulfilment of the pre-condition that the sum in respect of which TDS is to be deducted has to be shown to be chargeable to tax.:HC 

Milling of paddy by rice millers liable to 5% GST: FinMin clarification

Ministry of Finance clarifies that custom milling of paddy by Rice millers for Civil Supplies Corporation is liable to GST and not exempted under Notification No. 12/2017 - Central Tax (Rate), dated June 28, 2017 (Sr. no. 55) and corresponding notifications issued under IGST/UTGST Acts; Explains that, milling of paddy is not an intermediate production process in relation to cultivation of plants, but a process carried out after cultivation is over and paddy harvested; Milling of paddy into rice changes its essential characteristics, further, such process is not usually carried out by cultivators but by rice millers; Accordingly, such process of milling of paddy into rice cannot be considered as intermediate production process in relation to cultivation of plants for food, fibre or agricultural produce envisaged under the Notification; Moreover, such activity shall be liable to GST at rate of 5% pursuant to reduction in rate on services by way of job work in relation to all food and food products falling under Chapter 1 to 22: Finance Ministry Circular 

SC issues notice to assessee against CESTAT order holding water supply as 'sale'

SC issues notice to assessee in appeal filed by Revenue against CESTAT's order wherein it was held that supply of water to Chattisgarh State Industrial Development Corporation (CSIDC) is a sale of water, not taxable as ‘Business Support service” (BSS) u/s 65(105)(zzzq) of Finance Act, 1994; CESTAT noted that, assessee entered into agreement to own, develop, operate and maintain water supply, for which it was paid as per agreed tariff for supply of water and such rights were granted for 20 years after project construction without involvement of any third party; Noting that CSIDC has been consumer of water for payment of taxes on water supply to concerned State Department, CESTAT stated that whole scope of agreement is for supply of water; CESTAT remarked further that, supply of water by CSIDC to various industrial units is inconsequent as far as assessee is concerned, and giving a colour of service to pure sale of water is not legally tenable; Moreover, CESTAT observed that plain reading of statutory definition of BSS indicates that same is for outsourcing service and do not deal with any sale or purchase of items without reference to third party