RECENT INCOME TAX JUDGEMENTS

 

§  The Delhi Bench of the Income Tax Appellate Tribunal (Hon’ble ITAT) has ruled in the case of BLP Vayu (Project-1) Private Limited that the provisions of section 56(2)(viib) of the Income Tax Act, 1961 do not apply to the allotment of shares at a premium to a wholly-owned holding company.  The Hon’ble ITAT held that the transaction of allotment of shares at a premium between a holding company and its subsidiary company when seen holistically, there is no benefit derived by the taxpayer by issue of shares at certain premium notwithstanding that the share premium exceeds the FMV.  The objective of the provisions of section 56(2)(viib) is to prevent unlawful gains by the issuing company in the guise of capital receipts. The purpose of treating an unjustified premium charged on the issue of shares as taxable income under section 56(2)(viib) is entirely inapplicable to transactions between a holding company and its subsidiary company, where no income can be said to accrue to the ultimate beneficiary, i.e., the holding company.   Accordingly, the chargeability of deemed income arising from transactions between holding and subsidiary or vice versa, militates against the solemn object of section 56(2)(viib). 

 

§  Delhi ITAT held that benefit Allowed in Assessment shall not be withdrawn by exercising Power u/s 154 of Income Tax Act 

 

§  India-Spain taxes the fees for technical services at 20%. However, it has a most favoured nation clause in its protocol. By invoking this clause in the protocol, the tax payer chose the rate of 10% under the India-Portugal treaty. The Indian tax authorities sent a notice for a short deduction and treated the Indian entity at default since the circular of Feb 2022 states that the protocol benefit shall not be taken unless it is notified by the Indian government separately. Finally, the higher appellate authority held that there is no need for a separate notification in order to make the protocol benefit applicable to the Spanish entity.

 

§  An Indian entity receives a dividend from the Omani entity. The said dividend is exempt under the Omani domestic tax law (Article 8). The Indian entity still claims a withholding tax credit in India. Is that possible? - This is known as tax sparing where the double tax treaty provides for the admissibility of tax credit regardless of the exempt dividend in Oman. This is Article 25(4) of the India-Oman double tax treaty. This clause is in the India-UAE, India-Thailand as well. There have been several rulings as well on this such as Polyplex corporation Ltd, Krishak Bharti.   

 

§  In an interesting judgment the the Hon’ble HC of Delhi has upheld the ITAT decision in case of Polyplex Corporation Ltd, in relation to matter related to deemed tax credit arising from a Thailand subsidiary. The HC held that the deemed tax of 10%, that was otherwise spared by Thailand tax authority, shall be allowed as credit to the Indian company on the dividend income earned by the parent from its Thai subsidiary, considering the concept of ‘tax sparing’

 

§  The Delhi High Court declared that the subscription amount earned by a non-resident taxpayer from Indian entities is not taxable as royalty or fee for technical services